Title: On the Pricing and Hedging of Volatility-Linked Notes
Abstract: Abstract: This paper investigates the pricing and hedging of a new volatility derivative in Mainland China, called volatility-linked notes. Firstly, we describe its underlying volatility-historical volatility of SHSCI and its specific clauses, then calibrate the underlying volatility using GARCH(1,1). It finds that the mean-reverting phenomenon of SHSCI volatility exists. Secondly, we propose two pricing model using replicated method and Monte-Carlo simulation, respectively. It works out similar outcomes. Finally, a Delta-hedging scheme of the volatility-linked notes is shown, however, the estimated result is not satisfactory as the absence of more efficient hedging instruments like index future.
Publication Year: 2010
Publication Date: 2010-01-01
Language: en
Type: article
Indexed In: ['crossref']
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