Research On Risk Hedging Of Foreign Exchange Options In Incomplete Market

Under the background of repeated international epidemics and turbulent world layout,the foreign exchange and foreign trade trading markets have been affected.China’s option market is still in the emerging stage,and various incomplete factors increase the pressure on hedging.Since the introduction of RMB foreign exchange options,it has accelerated the process of RMB internationalization,brought a sense of urgency of risk prevention and control to the development of financial related businesses,and increased the demand for option pricing and hedging research in emerging financial markets.In order to effectively reduce hedging errors and improve the risk management ability of market makers,it is urgent to conduct in-depth research on option hedging transactions in combination with the actual characteristics of China’s financial market,and constantly improve and innovate the hedging mechanism suitable for China’s national conditions.This paper studies the risk hedging of foreign exchange options in incomplete market.The full text is as follows.Firstly,it briefly describes the background of options and other derivative financial products,as well as the development and significance of China’s derivatives market and RMB foreign exchange options.Sort out the research results of domestic and foreign scholars on options and the content of this paper.At the same time,it lays the foundation of foreign exchange option pricing and fractal market theory for the later paper.Secondly,it explores the hedging error and hedging strategy of foreign exchange options in the incomplete market.Based on the assumptions of the standard B-S model and combined with the actual market situation,relax and integrate multiple assumptions: adopt the fractal market hypothesis to deal with the autocorrelation of asset return,use the modified interest rate parity formula to deal with the problem that the interest rate parity formula is not applicable to emerging financial markets,adopt discrete static and dynamic delta hedging strategies and consider transaction costs to balance the relationship between discrete hedging frequency and transaction costs.The error formulas of spot hedging and forward hedging are derived under multiple incomplete conditions.The empirical analysis verifies that the error formula is reasonable,and the introduction of friction coefficient still has a certain reference value for judging the optimal hedging method when comparing the forward hedging error and spot hedging error in the fractal market.Then,based on the general delta hedging strategy,this paper attempts to introduce the hybrid hedging strategy which can give full play to the hedging benefits into the foreign exchange market.Based on the fractal market hypothesis,the mixed hedging strategy of foreign exchange European options is derived by discrete trading.Through empirical simulation,the strategy is comprehensively investigated from three aspects: hedging frequency,risk preference and strike price.It is verified that the hybrid hedging strategy can not only reduce the error level,but also stabilize the error fluctuation in the foreign exchange fractal market;It also obtains a risk preference interval better than delta hedging strategy,breaks through the single limitation of delta strategy and gives full play to hedging benefits.At the same time,the optimal hedging frequency is discussed in the market with multiple incomplete factors.In order to balance the relationship between error risk and transaction cost of discrete hedging,the optimal hedging frequency is explored when delta dynamic hedging and hybrid hedging strategies are adopted respectively.Through multi angle empirical research,it is concluded that daily hedging can best reflect the hedging advantage.Finally,the full text summarizes and prospects.It is believed that the quantitative characterization of incomplete factors and the innovation of hedging strategies will be one of the research hotspots in the financial field in the future.