Analysis On Dynamic Hedging Strategy Of Asian Bid-directional Spread OTC Options Under “Insurance Plus Futures”

Xinjiang is a major cotton-producing province in China.How can cotton farmers and cotton textile-related enterprises avoid the risk of cotton price fluctuations is an important issue that financial service institutions and entity enterprises need to consider together.In order to vigorously explore the development of new models of financial support for agriculture,the government has issued a series of documents on enriching agricultural insurance risk management tools,guiding the insurance industry and the securities and futures industry to jointly carry out various "insurance + futures" business pilot models.Under the pilot mode of "insurance + futures",insurance companies develop cotton target price insurance products based on cotton futures prices,and cotton farmers and purchasing and processing enterprises guarantee income by purchasing cotton target price insurance.while insurance companies provide agricultural insurance for farmers,they "reinsurance" the insured cotton target price insurance by purchasing over-the-counter options of third-party risk management institutions such as futures companies.Futures companies carry out hedging operations based on the cotton futures prices listed on the commodity futures exchange to hedge the risk of selling over-the-counter options to insurance companies,thus returning the risk to the market and finally forming a closed loop in which the risk is dispersed and benefiting all parties,so as to achieve win-win results.Because option products have the nonlinear characteristics of limited returns and unlimited losses,third-party risk management institutions need to use futures contracts to copy options and choose appropriate dynamic hedging strategies to hedge their own risk of selling over-the-counter options in the futures market.Because different dynamic hedging strategies will produce different hedging results when hedging over-the-counter options,appropriate dynamic hedging strategies can be used to obtain hedging gains to make up for the loss of options.however,if the use of inappropriate dynamic hedging strategy may even lead to greater losses,in this case,the choice of dynamic hedging strategy is particularly critical.On the basis of option pricing and hedging theory,futures contract replication option method,dynamic hedging strategy and evaluation criteria,this paper takes the Asian two-way OTC option signed in Minsheng Futures "Insurance + Futures" cotton pilot project as an example to study the dynamic hedging strategy which is most suitable for hedging this OTC option.The subject matter of the OTC option is Zhengmian 1905 futures contract listed in Zhengzhou Commodity Exchange.Through the dynamic hedging analysis of Zhengmian 1905 futures contract,the hedging effect and risk of the OTC option under fixed time point hedging strategy,fixed interval hedging strategy and discretionary hedging strategy are studied,and the optimal dynamic hedging strategy is selected.Firstly,this paper combs the relevant knowledge of option pricing and hedging ratio index,futures contract replication option method,dynamic hedging strategy and evaluation criteria,which lays a theoretical foundation for follow-up empirical analysis.this paper expounds the basic situation of the cotton pilot project under the Minsheng futures "insurance + futures" mode,including the background of the pilot project,the participants of the three parties,the insurance products and over-the-counter options of the project.Thirdly,according to the terms of the Asian two-way spread OTC option contract of Minsheng Futures Cotton pilot Project,the operation process of the OTC option is explained in detail.Finally,according to the specific contract parameters of Asian two-way spread over-the-counter options,the corresponding hedging ratio index Delta,is calculated by Monte Carlo simulation method,and then the fixed time point hedging strategy,fixed interval hedging strategy and discretionary hedging strategy are used to simulate hedging,and the advantages and disadvantages of the three strategies are compared from the point of view of hedging effect and risk,so as to choose the optimal dynamic hedging strategy.It is found that when hedging Asian two-way spread over-the-counter options,because the settlement price is the average of the closing price of futures contracts over a certain period of time,the settlement price tends to be stable gradually.therefore,the introduction of intra-day high-frequency discretionary hedging strategy and fixed-time hedging strategy is not suitable for this kind of over-the-counter options.Relatively speaking,fixed interval hedging strategy is the best hedging strategy,and Delta dynamic hedging strategy is suitable for China’s current futures market.Therefore,as selling institutions of over-the-counter options,such as futures companies,when hedging over-the-counter options,they should choose appropriate dynamic hedging strategies according to the level of risk they can bear and the key terms of the specific over-the-counter option contracts.at the same time,futures companies should also make more use of Asian options in financial support for agriculture,and develop more flexible and high-quality over-the-counter options.