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DERIVATIVES ABSTRACTS"Macro-Hedging for Commodity Exporters"
DAMIANO SANDRI, International Monetary Fund (IMF) - Research Department This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption. "Credit Default Swap Spreads and Variance Risk Premia"
HAO WANG, Tsinghua University We find that variance risk premia, defined as the spread between the option-implied and expected variances, have a prominent predictability for the credit default swap spreads at individual firm level. Such a predictability cannot be crowded out by that of the market and firm level credit risk factors identified in previous research. We demonstrate that the strong predictability of implied variance for credit spreads is mostly explained by either variance premium or expected variance. Our findings suggest that variance risk premium is a relatively clean measure of a firm’s exposure to macroeconomic uncertainty or systematic variance risk, while option-implied variance may be contaminated by idiosyncratic variance risk. Such a result is consistent with the market level evidence that variance risk premium predicts credit spread variation. "Hedging European Derivatives with the Polynomial Variance Swap Under Uncertain Volatility Environments"
AKIHIKO TAKAHASHI, University of Tokyo - Graduate School of Economics This paper proposes a new hedging scheme of European derivatives under uncertain volatility environments, in which a weighted variance swap called the polynomial variance swap is added to the Black-Scholes delta hedging for managing exposure to volatility risk. In general, under these environments one cannot hedge the derivatives completely by using dynamic trading of only an underlying asset owing to volatility risk. Then, for hedging uncertain volatility risk, we design the polynomial variance, which can be dependent on the level of the underlying asset price. It is shown that the polynomial variance swap is not perfect, but more efficient as a hedging tool for the volatility exposure than the standard variance swap. In addition, our hedging scheme has a preferable property that any information on the volatility process of the underlying asset price is unnecessary. To demonstrate robustness of our scheme, we implement Monte Carlo simulation tests with three different settings, and compare the hedging performance of our scheme with that of standard dynamic hedging schemes such as the minimum-variance hedging. As a result, it is found that our scheme outperforms the others in all test cases. Moreover, it is noteworthy that the scheme proposed in this paper continues to be robust against model risks.
ULKEM BASDAS, Middle East Technical University This paper examines the lead-lag relationship between the Istanbul Stock Exchange 30 (ISE 30) Index and index futures prices at the Turkish Derivatives Exchange using daily observations from February 2005 to May 2008. It is found out that spot prices lead the futures prices for ISE 30 Index contrary to the results for different countries. Besides, the forecasting performances of Error Correction Model (ECM), ECM with Cost of Carry (COC), Autoregressive Integrated Moving Average (ARIMA) and Vector Autoregressive (VAR) Model are compared. The results support the superior performance of ECM. This study underlines the difference in direction of the lead-lag relation for Turkey that has a significant value for traders, and the performance of ECM for forecasting purposes. | ||||||||||
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Solicitation of Abstracts
Derivatives publishes working and accepted paper abstracts covering a range of topics in the field including hedging with derivatives, managing foreign exchange rate risk, derivative security pricing models, embedded options, arbitrage in the derivatives markets and institutional features associated with options and derivative securities.
Distribution ServicesIf your organization is interested in increasing readership for its research by starting a Research Paper Series, or sponsoring a Subject Matter eJournal, please email: RPS@SSRN.com Distributed by:Advisory BoardDerivatives EDWARD I. ALTMAN DENNIS R. CAPOZZA DON CHEW J. DAVID CUMMINS DOUGLAS W. DIAMOND EUGENE F. FAMA STEPHEN FIGLEWSKI STUART I. GREENBAUM JONATHAN M. KARPOFF KENNETH LEHN STANLEY R. PLISKA CHARLES I. PLOSSER KATHERINE SCHIPPER ALAN SCHWARTZ G. WILLIAM SCHWERT RENE M. STULZ ROSS L. WATTS
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