Int. J. of Financial Markets and Derivatives   »   2014 Vol.3, No.3

 

 

Title: Hedging price changes in the S&P 500 options and futures contracts: the effect of different measures of implied volatility

 

Author: Jitka Hilliard

 

Address: Department of Finance, Raymond J. Harbert College of Business, Auburn University, Auburn, AL 36849-5245, USA

 

Abstract: We evaluate the performance of delta, delta-gamma and delta-vega hedges on the S&P 500 futures options with a particular focus on importance of daily volatility updating and the use of price-change implied volatility. Our findings indicate that the hedging performance of Black's model improves with daily updating of implied volatility and fitted price-change implied volatility for both calls and puts. Surprisingly, neither directly estimated implied price-change volatility nor introduction of additional traded option to the hedging portfolio seems to improve the hedging performance.

 

Keywords: delta hedge; delta-gamma hedge; delta-vega hedge; S&P 500 futures options; implied volatility; hedging price changes; hedging performance.

 

DOI: 10.1504/IJFMD.2014.059638

 

Int. J. of Financial Markets and Derivatives, 2014 Vol.3, No.3, pp.241 - 259

 

Date of acceptance: 02 Oct 2013
Available online: 04 Mar 2014

 

 

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