Research On Pricing And Hedging Strategy Of China Covered Warrants

The covered warrant,a novel derivative security, brings a new investment product to the financial markets. It provides a new method to manage risk, strengthens Chinese brokers' competitivity, and connects China financial markets to the global financial markets. Since it is a high risk investment tool as well due to its specific features, the pricing of the covered warrant is very important to both investors and issuers to manage investment risks, which is the research focus of this dissertation. The main contents of this dissertation are as follows.First, the concepts of the covered warrant are introduced briefly, and its specific features are characterized. The development history and status quo of covered warrants in Chinese and oversea financial markets are reviewed, and the importance of developing covered warrant market in the mainland financial markets of China is pointed out.Then we discuss the major pricing models for the covered warrants, and review the domestic and foreign researches about pricing models. We adopt mainly the Black-Sholes Model, the Binominal Model, and the Boyle&Vorst Model to analyze 12 covered warrants issued in the mainland financial market of China by using the historical volatility and the implied volatility. The analyses reveal that the Boyle&Vorst model is the optimal pricing model for the covered warrants in the mainland financial markets of China based on the implied volatility. Comparatively, it offers a better pricing model for the covered warrant in mainland financial markets.Next, the hedging strategy based on covered warrants and their underlying stocks are analyzed. Four hedging strategies are proposed based on the Wilmott model, the Leland model, the Delta interval hedging strategy, and the maximized utility strategy. By using the Monte Carlo simulation, we investigate the covered warrants that are either expired or not-expired, and evaluate these strategies with overall profit-and-loss indexes and overall VaR. The sensitivity analyses of these strategies are also carried out.In the seventh chapter of this dissertation, the idea and scheme for designing and realizing the information system for covered warrants are introducd. Based the business driven development model, the system serves as a good platform to support the interaction between computers and businessmen in the process of innovation in the security market.Finally, this dissertation makes a brief summary, and concludes with some suggestions for developing the covered warrant market in China.