Research On Hedging Strategies Of Barrier Options

This paper is a research on hedging strategies of barrier options.Barrier option is the most important structure of OTC derivatives market in China,which is embedded in many structured financial products.Among these financial products,snowball products have the largest circulation and the most complex structure in recent years.There is no clear optimal hedging strategy for complex obstacle options either academically or in practice.Therefore,this paper studies three dimensions of barrier option hedging from the perspective of issuers: First,how to choose different volatility models in the current mainstream Delta hedging strategy.Second,in the Delta hedging strategy,how to adjust different hedging strategies and choose different risk exposures.Third,the comparison between Delta hedging strategy and the weak static replication hedging strategy under the option instrument.First,the choice of volatility model.In the practice of OTC derivatives market,the main pricing and hedging methods for barrier options and their embedded complex structured products are simple Monte Carlo simulation pricing and Delta dynamic hedging strategy using historical volatility parameters.Historical volatility is the most common and simple volatility parameter in the market,but simply using it in the pricing of barrier option products has two shortcomings: On the one hand,historical volatility is a reflection of the historical information of the stock market,and can not well reflect the market’s prediction of future volatility information.On the other hand,historical volatility is not a good representation of the volatility smile in the options market.Therefore,in addition to considering the historical volatility of different periods,three implied volatility parameters will also be included in this study: the implied volatility of the strike price and term matching method,the implied volatility of the flat-value option and the implied volatility of the SVI model.Second,the choice of Delta hedging strategy.Delta dynamic hedging using futures instruments with high market liquidity is the most commonly used hedging means in domestic market practice.However,considering the different risk attitudes and actual operating costs in practice,Delta hedging also has a lot of strategic adjustments.In the study of Delta dynamic hedging strategy,this paper will compare the hedging profit and loss effect of ordinary hedging strategy and stop-loss strategy,and compare the hedging effect of enhanced hedging strategy,intermediate hedging strategy and weakened hedging strategy under three different risk exposures.Third,the selection of weak static replication strategy.Barrier option is a typical discontinuous return structure and strong path dependent option.Simple Delta dynamic hedging strategy is not ideal for risk hedging under extreme conditions.Therefore,this paper also includes the weak static replication hedging strategies using option instruments into the comparative study.The boundary conditions of barrier options can be reproduced by the combination of ordinary options,which can effectively solve the shortage of Delta hedging.However,because the development of the option market is not perfect,the research on the weak static replication strategy will be carried out under the hypothetical ideal market condition to provide the forward-looking research.Based on the historical data of CSI 300 stock index and futures and options markets from August 3,2020 to November 11,2022,this paper back-tested the hedging situation under different strategies.The sample size is increased by generating contracts on a rolling basis every five days.The hedging situation of each strategy and each contract is integrated through statistical analysis of hedging return,standard deviation,maximum profit and loss and risk-return index.Then it verifies that part of Delta dynamic hedging strategy can indeed bring relatively stable profit space.In comparison,under the backtest samples selected in this paper,the stop-loss Delta hedging strategy is significantly better than the ordinary Delta hedging strategy;Under different risk exposure strategies,the hedge weakening strategy is better.In terms of volatility selection,the backtest effect of the Delta hedging strategy under the90-day historical volatility parameter and the implied volatility parameter under the SVI model is better.Due to the imperfect structure of the option market,there is no suitable option instrument for hedging the mainstream snowball products.Therefore,the weak static copy strategy is carried out in the ideal options market.The same backtest interval test shows that for the singular structure with discontinuous return structure,the weak static replication strategy has more stable hedging returns,and the higher the hedging frequency,the better the hedging effect.