Title: Optimal option portfolio hedging strategy with non-Gaussian fluctuations

Authors: Haykel Hamdi; Jihed Majdoub

Addresses: Faculty of Economics and Management of Sousse, University of Sousse, Tunisia; LAREQUAD FSEG de Tunis, University of Tunis El Manar, Tunisia. ' Institut Supérieur de Gestion, 2000 Bardo, University of Tunis, Tunisia; LAREQUAD FSEG de Tunis, University of Tunis El Manar, Tunisia

Abstract: The third and fourth moments are two important factors in designing the optimal hedge strategy. This paper investigates the problem of futures hedging under the third and fourth moment based on the multi-objective programming. As the price of the underlying asset changes over time, delta of the option changes and a gamma hedge is required along with delta hedge to reduce risk. This motivates us to find an improvement in delta approximation for various models as well as to investigate the extent of such improvement across fourth moment models. We develop in this work a new framework of risk measure via the fourth moment order of expected utility which is more sensitive to large fluctuations in the variance and risk aversion. Results show that the new approach of Delta optimisation with expected utility ensure significant improvement in modelling option prices leading to better risk-management decision-making.

Keywords: risk aversion; utility functions; options on the CAC 40 index; delta hedging; hedging strategy optimal extreme risk.

DOI: 10.1504/IJESB.2020.104240

International Journal of Entrepreneurship and Small Business, 2020 Vol.39 No.1/2, pp.27 - 42

Received: 15 Aug 2017
Accepted: 26 Feb 2018
Published online: 23 Dec 2019 *

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