Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5091555 | Journal of Banking & Finance | 2006 | 11 Pages |
Abstract
The objective of this paper is to introduce a new volatility instrument, an option on a straddle, which can be used to hedge volatility risk. The design and valuation of such an instrument are the basic ingredients of a successful financial product. In order to value these options, we combine the approaches of compound options and stochastic volatility. Our numerical results show that the straddle option is a powerful instrument to hedge volatility risk. An additional benefit of such an innovation is that it will provide a direct estimate of the market price for volatility risk.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Menachem Brenner, Ernest Y. Ou, Jin E. Zhang,