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Hedging price changes in the S%P 500 options and futures contracts: the effect of different measures of implied volatility

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  • Jitka Hilliard

Abstract

We evaluate the performance of delta, delta-gamma and delta-vega hedges on the S%P 500 futures options with a particular focus on importance of daily volatility updating and the use of price-change implied volatility. Our findings indicate that the hedging performance of Black's model improves with daily updating of implied volatility and fitted price-change implied volatility for both calls and puts. Surprisingly, neither directly estimated implied price-change volatility nor introduction of additional traded option to the hedging portfolio seems to improve the hedging performance.

Suggested Citation

  • Jitka Hilliard, 2014. "Hedging price changes in the S%P 500 options and futures contracts: the effect of different measures of implied volatility," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 3(3), pages 241-259.
    • Handle: RePEc:ids:ijfmkd:v:3:y:2014:i:3:p:241-259
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