Static hedging of vanilla and exotic options in a South African context
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Date
Authors
Levendis, Alexis
Mare, Eben
Journal Title
Journal ISSN
Volume Title
Publisher
Operations Research Society of South Africa
Abstract
In this paper, we test the performance of a static hedging strategy for a long-dated European call option and European spread call option in South Africa. The stochastic volatility
double jump (SVJJ) model is calibrated to historical FTSE/JSE Top40 returns to generate
real-world FTSE/JSE Top40 prices at future dates. The SVJJ model is also calibrated to
the FTSE/JSE (Top40) implied volatility surface in order to value the options under the
risk-neutral measure. Two static hedging programs are then implemented to test their effectiveness when replicating a long-dated European call option and European spread call
option. Our results indicate that static hedging is a simple, yet effective, solution when
hedging non-exchange-traded options with vanilla exchange-traded options.
Description
Keywords
Real-world measure, Risk-neutral measure, Calibration, Replicating portfolio, Static hedging, SDG-08: Decent work and economic growth, SDG-09: Industry, innovation and infrastructure, Stochastic volatility double jump (SVJJ) model
Sustainable Development Goals
SDG-08:Decent work and economic growth
SDG-09: Industry, innovation and infrastructure
SDG-09: Industry, innovation and infrastructure
Citation
Levendis, A. & Maré E. 2024, ‘Static hedging of vanilla and exotic options in a South African context’, ORiON, vol. 40, no. 1, pp. 25-44, doi : 10.5784/40-1-768.