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Stock options

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FINANCE --- OPTIONS --- FINANCIAL FUTURES

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This paper develops a method for option hedging which is consistent with time-varying preferences and probabilities. The preferences are expressed in the form of an empirical pricing kernel (EPK), which measures the state price per unit probability, while probabilities are derived from an estimated stochastic volatility model of the form GARCH components with leverage. State prices are estimated using the flexible risk-neutral density method of Rosenberg (1995) and a daily cross-section of option premia. Time-varying preferences over states are linked to a dynamic model of the underlying price to obtain a one-day ahead forecast of derivative price distributions and minimum variance hedge ratios. Empirical results suggest that risk aversion over S&P500 return states is substantially higher than risk aversion implied by Black-Scholes state prices and probabilities using long run estimates of S&P500 return moments. It is also found that the daily level of risk aversion is strongly positively autocorrelated, negatively correlated with S&P500 price changes,and positively correlated with the spread between implied and objective volatilities. Hedging results reveal that typical hedging techniques for out-of-the-money S&P500 index options, such as Black-Scholes or historical minimum variance hedging, are inferior to the EPK hedging method. Thus, time-varying preferences and probabilities appear to be an important factor in the day-to-day pricing of S&P500 options.

Options (Finance) --- Mathematical models.

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Futures market. --- Options (Finance) --- Futures. --- Futures contracts --- Futures trading --- Trading, Futures --- Derivative securities --- Investments --- Call options --- Calls (Finance) --- Listed options --- Options exchange --- Options market --- Options trading --- Put and call transactions --- Put options --- Puts (Finance) --- Futures exchanges --- Market, Futures --- Markets

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This book provides the first systematic classification and treatment to essentially all exotic options currently trading at the Over-the-Counter (OTC) market. It contains exact closed-form pricing formulae and approximated closed-form pricing formulae for all popular exotic options. It includes arguments for and pricing formulae of exotic options with more flexibility than most popular exotic options such as flexible Asian options with flexible weights to various observations in the average, Asian barrier options, correlation digital options, etc. Most of the analyses in this book are within t

Options (Finance). --- Exotic options (Finance) --- Investment & Speculation --- Finance --- Business & Economics --- Derivative securities --- Options (Finance) --- Mathematical models --- E-books --- FINANCE --- MONETARY MARKETS --- OPTIONS