Price risk management by using dynamic hedging based on advanced Black–Scholes model

Peili Lu (), Jiaqi Shen, Liheng Zhao, Haoyang Qin, Xunzhi Liu and Zhongxing Ye
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Peili Lu: FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China
Jiaqi Shen: FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China
Liheng Zhao: FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China
Haoyang Qin: FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China
Xunzhi Liu: FieldsInvest Asset Management Co., Ltd., WITHUB Venture Park, No. 333, Hongqiao Road, Xuhui District, Shanghai, P. R. China
Zhongxing Ye: #x2020;School of Mathematical Science, Jiao Tong University, Shanghai 200240, P. R. China

International Journal of Financial Engineering (IJFE), 2020, vol. 07, issue 01, 1-14

Abstract: Price Risk Management plays an important role in Commodity trading and corporate purchasing or Sales plan. Futures are used to hedge the price risk which is linear, while options are used for the nonlinear one. This paper proposes an evaluation method of dynamic hedging strategy for corporate hedging commodity price risk based on advanced Black–Scholes Model. By using the inverse replication method, we get the dynamic hedging strategy which uses futures to replicate options. Finally, we apply the dynamic hedging strategy for corporate purchases and sales to either lower purchase cost or maintain the sales price.

Keywords: Options; dynamic hedging; volatility analysis; inverse replication (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2424786320500115

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