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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | The Cost of Hedging with Options |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 120 |
| Date | 2019 |
| Abstract Text | Looking at the publications on the topic of hedging a portfolio with options, one immediately realises that this is not only a heavily discussed topic, but also still relevant in today's time, maybe even especially in today's time, where uncertainty is dominating the global markets. Buying put options to protect a portfolio against heavy losses seems appealing in times, in which the worldwide economy is disrupted by political and geopolitical disputes. For conservative investors, it can be expected that the use of option related strategies that aim at protecting the portfolio against heavy losses, is able to outperform the benchmark on a risk-adjusted return basis with the use of certain risk measures, such as Value-at-Risk and Expected Shortfall. This thesis concentrates on the analysis of the risk-return figures of various hedging strategies for different types of investors, each with their own level of risk aversion. The hedging techniques range from buying protective put options on different global equity indices, as well as a bond index, given various levels of option moneyness, to selling covered call options on the same indices and levels of moneyness. One of the central aim of this thesis was to construct downside protected trading strategies on heavily traded indices, using static hedging techniques, resulting in strategies that are directly implementable by any type of risk averse investor, not only institutional investors. All trading strategies are compared on a risk-return level to a benchmark index, which consists of each respective underlying index, bought at the beginning of the backtesting period and held until the end of the backtesting period. The results are presented and tested for their statistical significance, as well as their ability to outperform the benchmark index on a risk-adjusted basis. We find that for most strategies, at most, only a weak statistical significance exist, that the returns of the individual strategies are different from the benchmark's returns and that most hedging strategies that involve the buying of put options are not able to outperform the benchmark index, even on a risk-adjusted return level. Strategies that incorporate the selling of call options on the other hand, are most often able to generate superior risk-return figures than the benchmark index, but also show little to no statistical significance. |
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