Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy

Proactive hedging European option is an exotic option for hedgers in the options market proposed recently by Wang et al. It extends the classical European option by requiring option holders to continuously trade in underlying assets according to a predesigned trading strategy, to proactively hedge p...

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Main Authors: Meng Li, Xuefeng Wang, Fangfang Sun
Format: Article
Language:English
Published: Wiley 2019-01-01
Series:Discrete Dynamics in Nature and Society
Online Access:http://dx.doi.org/10.1155/2019/1070873
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author Meng Li
Xuefeng Wang
Fangfang Sun
author_facet Meng Li
Xuefeng Wang
Fangfang Sun
author_sort Meng Li
collection DOAJ
description Proactive hedging European option is an exotic option for hedgers in the options market proposed recently by Wang et al. It extends the classical European option by requiring option holders to continuously trade in underlying assets according to a predesigned trading strategy, to proactively hedge part of the potential risk from underlying asset price changes. To generalize this option design for practical application, in this study, a proactive hedging option with discrete trading strategy is developed and its pricing formula is deducted assuming the underlying asset price follows Geometric Fractional Brownian Motion. Simulation studies show that proactive hedging option with discrete trading strategy still enjoys strong price advantage compared to the classical European option for majority of parameter space. The observed price advantage is stronger when the underlying asset has more volatility or when the asset price follows closer to Geometric Brownian Motion. Additionally, we found that a higher frequency trading strategy has stronger price advantage if there is no trading cost. The findings in this research strongly facilitate the practical application of the proactive hedging option, making this lower-cost trading tool more feasible.
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institution Kabale University
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publishDate 2019-01-01
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series Discrete Dynamics in Nature and Society
spelling doaj-art-9a18a3f0dc5d4dc5ad40cd9252cb434d2025-02-03T05:45:29ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2019-01-01201910.1155/2019/10708731070873Pricing of Proactive Hedging European Option with Dynamic Discrete Position StrategyMeng Li0Xuefeng Wang1Fangfang Sun2School of Management, Harbin Institute of Technology, Harbin 150001, ChinaSchool of Management, Harbin Institute of Technology, Harbin 150001, ChinaSchool of Management, Harbin Institute of Technology, Harbin 150001, ChinaProactive hedging European option is an exotic option for hedgers in the options market proposed recently by Wang et al. It extends the classical European option by requiring option holders to continuously trade in underlying assets according to a predesigned trading strategy, to proactively hedge part of the potential risk from underlying asset price changes. To generalize this option design for practical application, in this study, a proactive hedging option with discrete trading strategy is developed and its pricing formula is deducted assuming the underlying asset price follows Geometric Fractional Brownian Motion. Simulation studies show that proactive hedging option with discrete trading strategy still enjoys strong price advantage compared to the classical European option for majority of parameter space. The observed price advantage is stronger when the underlying asset has more volatility or when the asset price follows closer to Geometric Brownian Motion. Additionally, we found that a higher frequency trading strategy has stronger price advantage if there is no trading cost. The findings in this research strongly facilitate the practical application of the proactive hedging option, making this lower-cost trading tool more feasible.http://dx.doi.org/10.1155/2019/1070873
spellingShingle Meng Li
Xuefeng Wang
Fangfang Sun
Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
Discrete Dynamics in Nature and Society
title Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
title_full Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
title_fullStr Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
title_full_unstemmed Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
title_short Pricing of Proactive Hedging European Option with Dynamic Discrete Position Strategy
title_sort pricing of proactive hedging european option with dynamic discrete position strategy
url http://dx.doi.org/10.1155/2019/1070873
work_keys_str_mv AT mengli pricingofproactivehedgingeuropeanoptionwithdynamicdiscretepositionstrategy
AT xuefengwang pricingofproactivehedgingeuropeanoptionwithdynamicdiscretepositionstrategy
AT fangfangsun pricingofproactivehedgingeuropeanoptionwithdynamicdiscretepositionstrategy