Research On Warrant Issuer's Hedging Strategy

The paper investigates warrant issuer's risk due to warrants issuing and his hedging strategy.First, in order to better model the financial asset return distribution, introduce the stochastic volatility model, give model estimation method. Then introduce the stochastic volatility model into the option pricing theory, give a brief review of various stochastic volatility model of option pricing methods and characteristics.Secondly, consider covered warrants and dynamic hedging. Dynamic hedging is maintaining delta neutral, through analysis of return and risk of the delta neutral portfolio, we find that the hedging error caused by discrete hedging follows chi distribution, and by a calendar spread example, pointing out that "selling volatility" is not a very clear concept, for this portfolio long gamma and short vega. As the volatility to calculate delta for delta hedging is different from actual volatility, it will lead to replication errors, investigates the affection of return distribution using the different volatilities (implied volatilities, actual volatilities) for delta hedging. This paper introduced our model, assuming the volatility lies between two extreme values (maximum and minimum), to avoid the risk of replication error, warrants issuer should use the maximum volatility to calculate delta for delta hedging. In stochastic volatility environment, publishers can choose different volatility according to his risk tolerance, use the maximum volatility for delta hedging at a given confidence level, to achieve the smallest VaR at the given confidence level. Finally, through analysis of examples with SH index, comparing to result of delta hedging with forecast volatility using GARCH model, the strategy avoid a greater loss. For the domestic brokers, this strategy is also very easy to reach, they can estimate GARCH (1,1) model using historical data, find maximum volatility according to given confidence level. Analyze the recent Hong Kong warrants market, and point out different profit mode under different market conditions.Finally consider exotic options and static hedging. Since static hedging have many advantages relative to dynamic hedging, so we investigate static hedge for exotic options with stochastic volatilities. This paper focus on barrier options, first consider the risk and profit characteristics of 0-1 options, then consider the risk and profit characteristics of american 0-1 options, pointing out that it is more like option of the time, rather than option of price. Consider the behavior of risk parameter for barrier options, pointing out that the delta isn't continuity, many features that are different from the characteristics of vanilla options. By introducing Put-Call symmetry, barrier options can be decomposed into portfolio of vanilla options and american 0-1 options. Through analysis of warrant 6476, an active trading callable bull contract in HKEx, results show that the decomposition is valid, static hedging strategy is workable. Since the path-dependent options are very sensitive to volatility, we must build model to describe the skew and smile. As SABR model is a good model to capture the dynamic process of skew and smile, and in line with implied volatility curve in the market, so it provide an easy way to compute market risks, including first-order and second-order risks of volatility. Therefore, we use SABR model to model the asset return distribution, the revised composition of the vanilla options can be drawn under the SABR model. Through analysis of HSI index warrants / options at November 21, 2007, results show the smile and skew are heavily dependent on the time to expired. We give static hedging methods for exotic options under consideration of the existence of skewed asset distribution using SABR model.