University of Twente Student Theses


Analysis of path-dependency in option value enhancement

Liu, Zhanxu (2019) Analysis of path-dependency in option value enhancement.

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Abstract:Inspired by the market value enhancement concept of Conic hedging, we conduct an experiment to explore the contribution of path-dependency in discrete-time hedging to market value improvement of European vanilla options, in 3-step trinomial tree models. Our experiment values bid and ask prices improvement transforming hedging method from path-independent to path-dependent, under a family of exponential utility functions. To model a slightly more realistic hedging process than Conic finance, we introduce entropic risk measure to simulate the bid-ask spread of underlying in the actual market. The results show that, the improvement of bid and ask prices is not significant, under path-dependent hedging. However, we believe the model optimization in terms of optimizing algorithms and capacity of handling large data set current model is an intriguing topic worth further researching.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics
Programme:Industrial Engineering and Management MSc (60029)
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