Title: Dynamic options hedging model under mark-to-market risk

Authors: Dongwei Shi; Yanyin Li; Xing Yu

Addresses: Sichuan University of Science and Engineering, Zigong, 643000, China ' School of Finance, Renmin University of China, Beijing,100872, China ' School of Economics and Business Administration, Central China Normal University, Wuhan, China

Abstract: In this article, a model for options hedging under the budget and margin calls restrictions for buying put options and selling call options, respectively, is proposed. The proposed models are then solved by using the innovative interior point approach. This study analyses the effectiveness of Chinese SSE 50ETF options for hedging with and without the addition of margin calls. We find that the hedging approach of net buying put options or net selling call options is less profitable than the hedging strategy of buying call options while simultaneously selling put options. To assess the validity of the study's conclusions, we examine the hedging efficiencies of several approaches when the underlying price has an upward tendency and find that the options hedging suggested in this research is still the best alternative. We advise investors to use call options and put options with lower strike prices for hedging in the sensitivity analysis.

Keywords: options hedging; mark-to-market risk; margin calls; dual interior point algorithm.

DOI: 10.1504/IJITM.2024.137769

International Journal of Information Technology and Management, 2024 Vol.23 No.2, pp.137 - 155

Received: 16 Jan 2022
Received in revised form: 04 Sep 2022
Accepted: 18 Oct 2022
Published online: 05 Apr 2024 *

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