MODIFICATION OF DELTA FOR CHOOSER OPTIONS

Marek Ďurica ()
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Marek Ďurica: University of Žilina, Faculty of Operation and Economics of Transport and Communications, Department of Quantitative Methods and Economic Informatics

CBU International Conference Proceedings, 2015, vol. 3, issue 0, 123-128

Abstract: Correctly used financial derivatives can help investors increase their expected returns and minimize their exposure to risk. To ensure the specific needs of investors, a large number of different types of non-standard exotic options is used. Chooser option is one of them. It is an option that gives its holder the right to choose at some predetermined future time whether the option will be a standard call or put with predetermined strike price and maturity time. Although the chooser options are more expensive than standard European-style options, in many cases they are a more suitable instrument for investors in hedging their portfolio value. For an effective use of the chooser option as a hedging instrument, it is necessary to check the values of the Greek parameters delta and gamma for the options. Especially, if the value of the parameter gamma is too large, hedging of the portfolio value using only parameter delta is insufficient and brings high transaction costs because the portfolio has to be reviewed relatively often. Therefore, in this article, a modification of delta-hedging as well as using the value of parameter gamma is suggested. Error of the delta modification is analyzed and compared with the error of widely used parameter delta. Typical patterns for the modified hedging parameter variation with various time to choose time for chooser options are also presented in this article.

Keywords: Chooseroption; delta; gamma; hedging (search for similar items in EconPapers)
JEL-codes: C00 G13 G23 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:aad:iseicj:v:3:y:2015:i:0:p:123-128

DOI: 10.12955/cbup.v3.593

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