Delta-neutral dynamic hedging of the HS300 stock index futures and option portfolio — The evidence from simulation

Abstract

The launch of Shanghai-Shenzhen 300 index futures can not only supply the hedging tools and liquidity, but also bring some new kind of risk. The principal of this research is to analyze the risk hedging policy of the index futures using various kinds of dynamic hedging portfolios of index futures and index options with the same underlying index. Firstly, we developed a delta-neutral dynamic hedging model of the stock index futures/option portfolio in a perfect market; Secondly, we completed the daily and weekly adjusting of dynamic delta-neutral hedging and proposed the dynamic-neutral adjusting strategy: adjusting continuously the stock index futures position to achieve zero-delta of the portfolios on the basis of the prerequisite of keeping the stock index option position constant. The results of this analysis show that a protective “delta-neutral” strategy produces a more effective hedge than the other hedging examined, daily adjusting is optimal. Thus, we further suggest that with the steady operation of Shanghai-Shenzhen 300 stock index futures, China could launch the stock index options in due time, thus to provide developing strategy for the stock index derivatives markets.