Portfolio hedging with option strategies : a simulation study in Amman Stock Exchange

Other Title(s)

محاكاة في سوق عمان المالي : دراسة تحويط المحفظة باستخدام استراتيجيات الخيارات

Dissertant

Halasa, Rula Hani Salman

Thesis advisor

al-Ali, Asad Hamid Ubayd

University

Mutah University

Faculty

Faculty of Business

Department

Department of Business Administration and Marketing

University Country

Jordan

Degree

Master

Degree Date

2007

English Abstract

This study aims to investigate the increasing fluctuations of the equity markets in post modern era that has been inherent in investments and financial performances.

This is specifically represented in Amman Stock Exchange ASE, thus portfolio hedging with option strategies has been emerged to reduce and sub duce the systematic risks.

The portfolio are exposed to high level of intensive risks resulting from common factors that cannot be diversified away.

The purpose of this study is to investigate the impact of ATM covered call writing and ATM protective put option strategies in pure portfolio performance from two sides, risks and returns.

Consequently, the study aimed to investigate whether the two hedged strategies, perform better than unhedged portfolio, testify the study hypotheses and to answer the relative questions.

The study sample consisted of fifty five companies listed in ASE.

In order to achieve the objective of the study, quarterly return of individual stocks after hedging with option strategies as a dependent variable and equally weighted index return (a proxy of market portfolio return) as an independent variable were used.

Therefore, the model of Black and Scholes has been implemented to calculate the ATM option prices.

Basic investment characteristics were calculated using Market Model for individual stocks and portfolios.

A number of portfolio performance measures that well accepted in developed markets were used.

The study has given many manifestations that highlight the importance of covered call and protective put option hedging strategies and concluded that covered call option is the superior than the other two strategies and more desirable for investing in ASE.

Hedging portfolio with covered call strategy and protective put strategy result in magnificent reduction in unsystematic risk, where covered call option strategy achieved 77.5 % and protective put option strategy achieved 50 %.

Simultaneously, the covered call strategy result in considerable reduction of systematic risk by 43 %.

While the protective put strategy result in small margin of reduction by 6.6 %.

The covered call strategy enhanced the portfolio return by 69 %.

Hedging a portfolio by selling covered call strategy lead to improve the performance of the portfolio according to the AIMR’s measures, Sharpe ratio ; Treynor ratio ; and Alpha Jensen.

Also achieved a magnificent performance when considering downside risk.

The researcher recommends to open an option market in Amman Stock Exchange.

Establish a Mutual Funds and hedged it with the same strategies applied in this study.

Using the Black and Scholes to price ITM and OUT options with the same portfolio and same period then compare the conducted results.

Main Subjects

Economy and Commerce

Topics

• Management
• Investments
• Jordan
• Amman

No. of Pages

86

Table of Contents

• APA
• MLA
• AMA

Language

English

Data Type

Arab Theses

Record ID

BIM-303767