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Article: Hedging volatility risk

TitleHedging volatility risk
Authors
KeywordsCompound options
Risk management
Stochastic volatility
Volatility index
Volatility options
Issue Date2006
PublisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jbf
Citation
Journal Of Banking And Finance, 2006, v. 30 n. 3, p. 811-821 How to Cite?
AbstractVolatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets. This risk is currently managed by volatility "swaps" or futures. However, this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset. The objective of this paper is to introduce a new volatility instrument, an option on a straddle, which can be used to hedge volatility risk. The design and valuation of such an instrument are the basic ingredients of a successful financial product. In order to value these options, we combine the approaches of compound options and stochastic volatility. Our numerical results show that the straddle option is a powerful instrument to hedge volatility risk. An additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk. © 2005 Elsevier B.V. All rights reserved.
Persistent Identifierhttp://hdl.handle.net/10722/85594
ISSN
2015 Impact Factor: 1.485
2015 SCImago Journal Rankings: 1.264
ISI Accession Number ID
References

 

DC FieldValueLanguage
dc.contributor.authorBrenner, Men_HK
dc.contributor.authorOu, EYen_HK
dc.contributor.authorZhang, JEen_HK
dc.date.accessioned2010-09-06T09:06:58Z-
dc.date.available2010-09-06T09:06:58Z-
dc.date.issued2006en_HK
dc.identifier.citationJournal Of Banking And Finance, 2006, v. 30 n. 3, p. 811-821en_HK
dc.identifier.issn0378-4266en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85594-
dc.description.abstractVolatility risk plays an important role in the management of portfolios of derivative assets as well as portfolios of basic assets. This risk is currently managed by volatility "swaps" or futures. However, this risk could be managed more efficiently using options on volatility that were proposed in the past but were never introduced mainly due to the lack of a cost efficient tradable underlying asset. The objective of this paper is to introduce a new volatility instrument, an option on a straddle, which can be used to hedge volatility risk. The design and valuation of such an instrument are the basic ingredients of a successful financial product. In order to value these options, we combine the approaches of compound options and stochastic volatility. Our numerical results show that the straddle option is a powerful instrument to hedge volatility risk. An additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk. © 2005 Elsevier B.V. All rights reserved.en_HK
dc.languageengen_HK
dc.publisherElsevier BV. The Journal's web site is located at http://www.elsevier.com/locate/jbfen_HK
dc.relation.ispartofJournal of Banking and Financeen_HK
dc.rightsJournal of Banking & Finance. Copyright © Elsevier BV.en_HK
dc.subjectCompound optionsen_HK
dc.subjectRisk managementen_HK
dc.subjectStochastic volatilityen_HK
dc.subjectVolatility indexen_HK
dc.subjectVolatility optionsen_HK
dc.titleHedging volatility risken_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0378-4266&volume=30&spage=811&epage=821&date=2006&atitle=Hedging+Volatility+Risken_HK
dc.identifier.emailZhang, JE: jinzhang@hku.hken_HK
dc.identifier.authorityZhang, JE=rp01125en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1016/j.jbankfin.2005.07.015en_HK
dc.identifier.scopuseid_2-s2.0-33644791736en_HK
dc.identifier.hkuros117273en_HK
dc.relation.referenceshttp://www.scopus.com/mlt/select.url?eid=2-s2.0-33644791736&selection=ref&src=s&origin=recordpageen_HK
dc.identifier.volume30en_HK
dc.identifier.issue3en_HK
dc.identifier.spage811en_HK
dc.identifier.epage821en_HK
dc.identifier.eissn1872-6372-
dc.identifier.isiWOS:000236642200002-
dc.publisher.placeNetherlandsen_HK
dc.identifier.scopusauthoridBrenner, M=7402358415en_HK
dc.identifier.scopusauthoridOu, EY=12768918000en_HK
dc.identifier.scopusauthoridZhang, JE=7601346659en_HK

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