This paper consists of two subjects. The first study analyzes the intrinsic hedging
risk in the auto call step down equity linked securities (ELS) based on underlying
indices including HSCEI, which are major products of the ELS market. Then it
proposes new hedging strategies based on Con...
This paper consists of two subjects. The first study analyzes the intrinsic hedging
risk in the auto call step down equity linked securities (ELS) based on underlying
indices including HSCEI, which are major products of the ELS market. Then it
proposes new hedging strategies based on Conditional Value at Risk (CVaR) using
stocks portfolio and futures.
Due to the non-symmetric bimodal return distribution of ELS, which comes
from the Knock-In (KI) property inherent in step down ELS structure, and the inherent shortfall risk in the ELS structure, a local delta hedging strategy has a limit.
In addition, hedging using futures is difficult because of 1) frequent roll-over related
with HSCEI futures, 2) price gap between underlying index and futures and 3) lack
of futures liquidity caused by excessively issuing ELS based on HSCEI. As a way
to deal with these problems, this paper proposes new hedging strategies : First step is to construct a stocks portfolio which tracks index using the method suggested by
Rockafellar and Uryasev (2002), Alexander, Coleman and Li (2006). Second step is
to hedge using stocks portfolio and futures.
It shows that 1) an index-tracking stocks portfolio based on CVaR has a better
performance and lower shortfall risk than index in the evaluation using market ratio,
information ratio and Sharpe ratio, and 2) hedging using stocks portfolio is better
than hedging using futures. As one of the policy proposals, if ETF, which tracks the
underlying indices of ELS based on CVaR, is listed on the exchange (KRX), various
kinds of mid-risk/mid-return structured products will be developed further, and also
hedging will be easy to manage.
The second study analyzes the strategy benchmark indices using the options.
First it compares the returns and risk of three covered call indices (KOSPI200 Covered
Call ATM, KOSPI200 Covered Call OTM and KOSPI200 PutWrite ATM) and
KOSPI200 ProtectivePut Index and analyzes the causes of the excess return. All
of the covered call indices had higher returns, lower volatility and higher Sharpe
ratio(and Sortino ratio) than KOSPI200. In particular, PutWrite ATM Index outperformed
largely with an annual return of 11.76%, compared to 5.48 % of the KOSPI
200 index during the analysis period. As a result of comparing skew of return distributions,
the covered call indices have changed from negatively skewed distribution
to symmetrical distribution over time. As time went by, the standard deviation in
return decreased and the kurtosis was increased, which resulted in a characteristic
that most of the return was concentrated close to the average. The reason why the
covered call indices performed well was that the implied volatility of options was
higher than the realized volatility. The implied volatility of at-the-money call options was 0.54% pt high on average, whereas that of at-the-money put options was
3.08% pt high, significantly influencing the outperformance of the PutWrite Index.
The reason for the high implied volatility is the imbalance in supply and demand in
the options market, where there are only many buyers of options to hedge against
a decline. Option sellers have no reason to sell if the price is not high enough to
compensate for the loss that would be caused by a sudden rise in volatility.
Implied volatility is not merely a current expectation of future realized volatility,
but rather can be seen as a prediction that reflects the tail-risk intrinsic in future
realized volatility. As the market is currently experiencing a low level of volatility,
implied volatility of options is expected to be higher than realized volatility, and
risk-adjusted outperformance in covered call indices is expected to continue.
This paper consists of two subjects. The first study analyzes the intrinsic hedging
risk in the auto call step down equity linked securities (ELS) based on underlying
indices including HSCEI, which are major products of the ELS market. Then it
proposes new hedging strategies based on Conditional Value at Risk (CVaR) using
stocks portfolio and futures.
Due to the non-symmetric bimodal return distribution of ELS, which comes
from the Knock-In (KI) property inherent in step down ELS structure, and the inherent shortfall risk in the ELS structure, a local delta hedging strategy has a limit.
In addition, hedging using futures is difficult because of 1) frequent roll-over related
with HSCEI futures, 2) price gap between underlying index and futures and 3) lack
of futures liquidity caused by excessively issuing ELS based on HSCEI. As a way
to deal with these problems, this paper proposes new hedging strategies : First step is to construct a stocks portfolio which tracks index using the method suggested by
Rockafellar and Uryasev (2002), Alexander, Coleman and Li (2006). Second step is
to hedge using stocks portfolio and futures.
It shows that 1) an index-tracking stocks portfolio based on CVaR has a better
performance and lower shortfall risk than index in the evaluation using market ratio,
information ratio and Sharpe ratio, and 2) hedging using stocks portfolio is better
than hedging using futures. As one of the policy proposals, if ETF, which tracks the
underlying indices of ELS based on CVaR, is listed on the exchange (KRX), various
kinds of mid-risk/mid-return structured products will be developed further, and also
hedging will be easy to manage.
The second study analyzes the strategy benchmark indices using the options.
First it compares the returns and risk of three covered call indices (KOSPI200 Covered
Call ATM, KOSPI200 Covered Call OTM and KOSPI200 PutWrite ATM) and
KOSPI200 ProtectivePut Index and analyzes the causes of the excess return. All
of the covered call indices had higher returns, lower volatility and higher Sharpe
ratio(and Sortino ratio) than KOSPI200. In particular, PutWrite ATM Index outperformed
largely with an annual return of 11.76%, compared to 5.48 % of the KOSPI
200 index during the analysis period. As a result of comparing skew of return distributions,
the covered call indices have changed from negatively skewed distribution
to symmetrical distribution over time. As time went by, the standard deviation in
return decreased and the kurtosis was increased, which resulted in a characteristic
that most of the return was concentrated close to the average. The reason why the
covered call indices performed well was that the implied volatility of options was
higher than the realized volatility. The implied volatility of at-the-money call options was 0.54% pt high on average, whereas that of at-the-money put options was
3.08% pt high, significantly influencing the outperformance of the PutWrite Index.
The reason for the high implied volatility is the imbalance in supply and demand in
the options market, where there are only many buyers of options to hedge against
a decline. Option sellers have no reason to sell if the price is not high enough to
compensate for the loss that would be caused by a sudden rise in volatility.
Implied volatility is not merely a current expectation of future realized volatility,
but rather can be seen as a prediction that reflects the tail-risk intrinsic in future
realized volatility. As the market is currently experiencing a low level of volatility,
implied volatility of options is expected to be higher than realized volatility, and
risk-adjusted outperformance in covered call indices is expected to continue.
주제어
#Covered Call PutWrite Implied Volatility Realized Volatility Protective Put CVaR ELS Index Tracking Shortfall Risk
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