Power options: hedging nonlinear risks

Robert G. Tompkins

Journal of Risk

Abstract: ABSTRACT This paper examines contingent claims where the terminal payoff is defined by a curved function and considers the case of squared power options. These products have been repackaged as continuous strike price options, where the strike price of a European option is softened to reduce nonlinear risk at expiration. Other applications include the ability to hedge future levels of implied volatility and to address a number of other nonlinear risks facing risk managers. The author considers the pricing and hedging of squared power options and shows that either a standard dynamic or a simple static approach with European options can effectively hedge these instruments.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-risk/2161194/power-options-hedging-nonlinear-risks (text/html)

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:rsk:journ4:2161194

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine ().