In this paper we implement dynamic term structure models that adopt bonds and Asian options in the estimation process. The goal is to analyze the pricing and hedging implications of term structure movements when options are (or not) included in the estimation process. We analyze how options affect the shape, risk premium and hedging structure of the dynamic factors. We find that the inclusion o...

The paper investigates the first and second orders moment transmission between gold and Indian industrial sectors with an application of portfolio design and hedging effectiveness using generalised VAR-ADCC-BVGARCH model. Our findings indicate unidirectional significant return spillover from gold to stock sectors. The negative values of estimated time varying conditional correlations are mainly...

This paper analyzes the wealth and risk incentive effects of managerial options and shareholdings on the hedging probability of UK listed Alternative Investment Market (AIM) companies. We find that the wealth incentive effect provided by managerial option holdings increases the hedging likelihood. On the contrary, the wealth incentive effect provided by managerial shareholdings decreases the he...

In this paper, we employ two stock pricing models: a Black-Scholes (BS) model and a Variance Gamma (VG) model, and apply the maximum likelihood method (MLE) to estimate corresponding parameters in each model. With the estimated parameters, we conduct Monte Carlo simulations to simulate spot prices and deltas of the European call option at different time spots over different sample paths. We foc...

This paper analyses the hedging decisions of an emerging economy which is exposed to market risks and whose debt contract is subject to collateral constraints. Within a sovereign debt model with default risk and endogenous collateral, we study the optimal choice of hedging instruments when both futures and non-linear derivatives are available. We examine in which way the hedging policy is affec...

The paper assesses the usefulness of selective hedging strategies when combined with forecast techniques in the live hog contract. The use of routine futures and options hedging is not attractive relative to a cash-only strategy. However, forecasting and hedging can contribute to price risk management improvement for risk-averse producers. Consistent with previous research, the results indicate...

This paper analyzes the performance of two hedging strategies on three different options when trading is limited to take place at discrete times. Specifically, we compare the mean, standard deviation, skewness, and kurtosis of the hedging error resulting from applying a delta hedge and mean square optimal hedge to a European call option, a digital call option, and a down-and-out barrier call op...

We study optimal hedging of barrier options using a combination of a static position in vanilla options and dynamic trading of the underlying asset. The problem reduces to computing the Fenchel-Legendre transform of the utility-indifference price as a function of the number of vanilla options used to hedge. Using the well-known duality between exponential utility and relative entropy, we provid...

We consider a strictly pathwise setting for Delta hedging exotic options, based on Föllmer’s pathwise Itô calculus. Price trajectories are d-dimensional continuous functions whose pathwise quadratic variations and covariations are determined by a given local volatility matrix. The existence of Delta hedging strategies in this pathwise setting is established via existence results for recursive s...

The paper deals with the valuation and the hedging of non path-dependent European options on one or several underlying assets in a model of an international economy allowing for both, interest rate risk and exchange rate risk. Using martingale theory and in particular the change of numeraire technique we provide a unified and easily applicable approach to pricing and hedging exchange options on...