Hedging with Stock Index Options: A Mean-Extended Gini Approach

Haim Shalit and Doron Greenberg
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Doron Greenberg: Ben-Gurion University of the Negev

No 911, Working Papers from Ben-Gurion University of the Negev, Department of Economics

Abstract: One of the more efficient methods to hedge portfolios of securities whose put options are not traded is to use stock index options. We use the mean-extended Gini (MEG) model to derive the optimal hedge ratios for stock index options. We calculate the minimum-variance hedge ratios and compare them to the mean-extended Gini ratios for some main stocks traded on the Tel Aviv Stock Exchange. For each value of risk aversion, MEG hedge ratios combine systematic risk with basis risk Our results show that increasing risk aversion reduces the size of the hedge ratio, implying that less put options are needed to hedge each and every security.

Keywords: Hedge ratios; systematic risk; basis risk; risk aversion; Mean-Gini (search for similar items in EconPapers)
Pages: 19 pages
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:bgu:wpaper:0911

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