EconPapers    
Economics at your fingertips  
 

Financial option insurance

Qi-Wen Wang and Jian-Jun Shu ()
Additional contact information
Qi-Wen Wang: Shanghai DianJi University
Jian-Jun Shu: Nanyang Technological University

Risk Management, 2017, vol. 19, issue 1, 72-101

Abstract: Abstract The option is a financial derivative, which is regularly employed in reducing the risk of its underlying securities. However, investing in options is still risky. Such risk becomes much more severe for speculators who utilize options as a means of leverage to increase their potential returns. In order to mitigate risk on their positions, the rudimentary concept of financial option insurance is introduced into practice. Two starkly dissimilar concepts of insurance and financial options are integrated into the formation of financial option insurance. The proposed financial product insures investors’ option premiums when “misfortune” befalls them. As a trade-off, they are likely to sacrifice a limited portion of their potential profits. The “loopholes” of the prevailing financial market are addressed and the void is filled by introducing a stable three-entity framework. Moreover, a specifically designed mathematical model is proposed. It consists of two portions: the business strategy of matching and a verification-and-modification process. The proposed model enables the option investors with calls and puts of different moneyness to be protected by the issued option insurance. Meanwhile, it minimizes the exposure of the option insurer’s position to any potential losses.

Keywords: Business strategy of matching; Risk management; Portfolio insurance; Futures options (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1057/s41283-016-0013-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:risman:v:19:y:2017:i:1:d:10.1057_s41283-016-0013-5

Ordering information: This journal article can be ordered from
https://www.palgrave.com/gp/journal/41283

Access Statistics for this article

Risk Management is currently edited by Igor Loncarski

More articles in Risk Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2020-01-08
Handle: RePEc:pal:risman:v:19:y:2017:i:1:d:10.1057_s41283-016-0013-5