Hedging Strategy Simulation For At-The-Money Forward Percentages Call Spreads European Option

Abstract

Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying asset or in a future contract. In other words, the holder does not have to exercise this right, unlike a forward or future. American option gives the right to purchase/sell underlying asset against predetermined strike price at any time up to maturity. An option is at-the-money if the strike price is the same as the current price of the underlying asset on which the option is written. An at-the-money option has no intrinsic value, only time value. Monte Carlo Simulations are used for the hedging strategy with various amount of data which try to compare the profit gain from the daily, weekly and monthly hedging and also simulate the option price with various number of simulation with Monte Carlo simulations.