Hedging European Options Against Risks Experienced In The Derivatives Market
View/ Open
Date
2020Author
Maina, Ndung’u Sammy
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
Options are a popular type of investment in the nancial derivatives market. The intention
of buying or selling options is to make pro ts. However, investors might end up making
losses if the market goes against their anticipation. The Greeks describe di erent dimensions
of risk involved when taking an option’s position. The Greeks are Delta, Gamma,
Rho, Kappa and Theta. The main aim of this study is achieved by creating a linear program
that maximizes a calculated theoretical pro t. The pro t is calculated by subtracting the
real market price of Net ix options from prices calculated using the Black-Scholes formula.
We observe that the theoretical prices are higher than the market price. The constraints
in our linear program are Greek neutralities. The neutrality of each Greek is achieved by
equating the sum of the positional Greeks to zero. The results of the discussion show that
Linear Programming can be applied to options to hedge against a combination of all risks
that are experienced in the nancial derivatives market. The case study reviewed how
the pro t related to options changes when we include all Greeks and when we reduce the
number of Greeks. It was observed that pro t is lowest when we include all Greeks and is
highest when we use one Greek. The number of shares to buy and sell in order to achieve
an optimal strategy for our portfolio are also derived. The e ect of shadow price on the
risks experienced in the market were also observed
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
The following license files are associated with this item: