Hedging strategies using LIFFE listed equity options

Abstract

Ex ante tests of the efficiency of the London options market explain alternative hedging strategies to fund managers who seek to comprehend the opportunities in the options markets and profit by potential market inefficiencies. Over and under valued options were used to form hedge portfolios, which were mostly positive indicating potential inefficiencies in LIFFE. Therefore options appear to incorporate the role of an investment strategy on their own and not only as a hedge against positions in the underlying stocks while the Black‐Scholes formula proved to be an easily computed and implemented way to make above normal, zero risk profits. This paper also confirms the ability of a weighted implied standard deviation to explain future volatility more accurately than historical volatility by use of regression analysis.

Citation

Nikolaos, D. and Christos, G. (2003), "Hedging strategies using LIFFE listed equity options", Managerial Finance, Vol. 29 No. 11, pp. 17-34. https://doi.org/10.1108/03074350310768544