Hedging price changes in the S%P 500 options and futures contracts: the effect of different measures of implied volatility

Jitka Hilliard

International Journal of Financial Markets and Derivatives, 2014, vol. 3, issue 3, 241-259

Abstract: We evaluate the performance of delta, delta-gamma and delta-vega hedges on the S%P 500 futures options with a particular focus on importance of daily volatility updating and the use of price-change implied volatility. Our findings indicate that the hedging performance of Black's model improves with daily updating of implied volatility and fitted price-change implied volatility for both calls and puts. Surprisingly, neither directly estimated implied price-change volatility nor introduction of additional traded option to the hedging portfolio seems to improve the hedging performance.

Keywords: delta hedge; delta-gamma hedge; delta-vega hedge; S%P 500 futures options; implied volatility; hedging price changes; hedging performance. (search for similar items in EconPapers)
Date: 2014
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