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Hedging with Stock Index Options: A Mean-Extended Gini Approach
Department of Economics, Ben-Gurion University, Beer Sheva, Israel
Department of Economics and Business Administration, Ariel University Center, Ariel, Israel
- 1 Department of Economics, Ben-Gurion University, Beer Sheva, Israel
- 2 Department of Economics and Business Administration, Ariel University Center, Ariel, Israel
Journal of Mathematical Finance·Volume 03 (2013)·Pages 119–129·Published 26 February 2013·DOI10.4236/jmf.2013.31011
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Abstract
One of the more efficient methods to hedge portfolios of securities whose put options are not traded is to use stock index options. We use the mean-extended Gini ( MEG ) model to derive the optimal hedge ratios for stock index options. We calculate the MEG ratios for some main stocks traded on the Tel Aviv Stock Exchange and compare them to the minimum-variance hedge ratios. Computed for specific values of risk aversion, MEG hedge ratios combine systematic risk with basis risk. Our results show that increasing the risk aversion used in the computation reduces the size of the hedge ratio, implying that less put options are needed to hedge away each and every security.
KeywordsHedge RatiosSystematic RiskBasis RiskRisk AversionMean-Gini
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