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Hedging with Stock Index Options: A Mean-Extended Gini Approach

Author

Listed:
  • Haim Shalit

    (Department of Economics, Ben-Gurion University of the Negev)

  • Doron Greenberg

    (Ben-Gurion University of the Negev)

Abstract

One of the more efficient methods to hedge portfolios of securities whose put options are not traded is to use stock index options. We use the mean-extended Gini (MEG) model to derive the optimal hedge ratios for stock index options. We calculate the minimum-variance hedge ratios and compare them to the mean-extended Gini ratios for some main stocks traded on the Tel Aviv Stock Exchange. For each value of risk aversion, MEG hedge ratios combine systematic risk with basis risk Our results show that increasing risk aversion reduces the size of the hedge ratio, implying that less put options are needed to hedge each and every security.

Suggested Citation

  • Haim Shalit & Doron Greenberg, 2009. "Hedging with Stock Index Options: A Mean-Extended Gini Approach," Working Papers 0911, Ben-Gurion University of the Negev, Department of Economics.
    • Handle: RePEc:bgu:wpaper:0911
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