Option Pricing Of Shanghai 50ETF Based On Jump Diffusion Models And Dynamic Hedging Analysis

The introduction of Shanghai 50 ETF option has not only provided Chinese investor a new arbitrage tool,but also a chance to reduce their risk in investment through the transaction of it.Black-Scholes Model(BS Model),a traditional model in options pricing,has its limitations due to the strict assumptions required.To find an option pricing model that matches the real data,the research adapts Merton jump diffusion model,and Variance Gamma model(VG Model)to price the option.With Gradient Descend Method and the data from 2017 to 2019,the researcher has calibrated the optimal parameters and solved the subjective choosing issue over the estimation of the parameters.Additionally,based on Merton jump diffusion model,and VG Model,the researcher tries to price Shanghai 50 ETF option with Fast Fourier Transform Method.Finally,Shanghai 50 ETF option’s Delta value is figured out with BS Model,Merton jump diffusion model,and VG model.A conclusion is drawn that in terms of accuracy,jump diffusion model,compared with BS Model,can significantly improve the accuracy and stability of pricing.It is worthy noting that the VG Model improves the pricing accuracy by almost 70%,and 45% by the Merton jump diffusion model.As for the risk hedging,the Delta dynamic hedging,based on the VG Model,is most effective.In this paper,it reduces investors 51.88%losses compared with a investing policy without hedging.