Testing the Technology of Synthetic Straddles

18 Pages Posted: 27 Apr 2014

See all articles by Yuriy Trifonov

Yuriy Trifonov

Lobachevsky State University of Nizhni Novgorod

Sergey Yashin

Lobachevsky University

Egor Koshelev

Lobachevsky University

Dimitry Podshibyakin

Lobachevsky State University of Nizhni Novgorod

Date Written: April 26, 2014

Abstract

A model of building and using synthetic straddles has been developed; it enables an investor to significantly reduce its individual equity risk related to its own basic assets, i.e. shares. The Black-Scholes model, which is regarded as a classical model, cannot be used for this purpose for the reason that a synthetic straddle provides for investor's combining a share under review and a risk-free bond in its portfolio, whereas the Black-Scholes model contains a risk-free interest rate only, but no risk-free bond. Therefore, to build a synthetic straddle, a binomial model is used. Such model takes account of straddle price variance according to regression forecast model. It is shown that the model is effective even in the context of shocking phenomena in the country's economy provided that an investor immediately responds to them.

Keywords: synthetic financial instruments, option, straddle, share risk

JEL Classification: C15, C22, G11, G12, G17

Suggested Citation

Trifonov, Yuriy and Yashin, Sergey and Koshelev, Egor and Podshibyakin, Dimitry, Testing the Technology of Synthetic Straddles (April 26, 2014). Available at SSRN: https://ssrn.com/abstract=2429657 or http://dx.doi.org/10.2139/ssrn.2429657

Yuriy Trifonov

Lobachevsky State University of Nizhni Novgorod ( email )

23 Prospekt Gagarina
Nizhni Novgorod, 603950
Russia
(831)4303952 (Phone)
(831)4303909 (Fax)

Sergey Yashin

Lobachevsky University ( email )

23 Prospekt Gagarina
Nizhny Novgorod, 603950
Russia
(+7 831) 462-30-90; 462-31-01 (Phone)
(+7 831) 462-30-85 (Fax)

HOME PAGE: http://www.unn.ru

Egor Koshelev (Contact Author)

Lobachevsky University ( email )

23 Prospekt Gagarina
Nizhny Novgorod, 603950
Russia
(+7 831) 462-30-90; 210-09-54 (Phone)
(+7 831) 462-30-85 (Fax)

HOME PAGE: http://www.unn.ru

Dimitry Podshibyakin

Lobachevsky State University of Nizhni Novgorod ( email )

23 Prospekt Gagarina
Nizhni Novgorod, 603950
Russia
(+7 831) 462-30-90; 462-31-01 (Phone)
(+7 831) 462-30-85 (Fax)

HOME PAGE: http://www.unn.ru/

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