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Hedging Strategies Using Options

Student: Mikhail Fadeev

Supervisor: Alexander Osharin

Faculty: Faculty of Economics

Educational Programme: Master

Year of Graduation: 2014

<p><strong>Annotation to the master&#39;s dissertation on &laquo;Hedging strategies using options&raquo;</strong></p><p>In our days, any business associated with many risks of financial losses. One of the most important aims of managers is to reduce the impact of risks on the financial results.</p><p>Hedging is one of the most popular methods of reducing risks. This Master&#39;s thesis is devoted to the analysis of option hedging strategies. Today Russian derivatives market &nbsp;has the tendency to increase in the number of transactions, followed by the European and American markets. The paper focuses on the option hedging strategies, because this way is cheaper than others. The aims of this work are:</p><p>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; To study theoretical aspects of option trading to understand the mechanism of hedging, which uses options.</p><p>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; To analyze and to classify basic option strategies.</p><p>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; To study and to put into practice the techniques of dynamic hedging.</p><p>The work consists of an introduction, two chapters, conclusion, bibliography and one appendix. Chapter 1 deals with the theoretical aspects of the options trading. Chapter 1 also represents the literature review. The second chapter presents examples of option strategies, which can be four types:</p><p>1. &nbsp;Simple Strategies.</p><p>2. &nbsp;Spreads.</p><p>3. &nbsp;Combination strategies.</p><p>4. &nbsp;Synthetic Strategy</p><p>The option strategies in this work are constructed of futures-style options on RTS index which trades on the Moscow Stock Exchange. The positions are analyzed in the program - Forts Option Analyzer. This paper focuses on strategies, some of them (types 1-3) consist only of option contracts, despite the fact that these positions reduce losses (losses are limited to the difference in premiums bought and sold option), it doesn`t mean to &ldquo;hedge&rdquo; because hedging is the process when investor opens opposite positions in different markets (in spot and derivative market). The work notes that, the fact that any profits profile &quot;option position&quot; can be formed by a synthetic creation of this position, which implies the existence of the underlying asset. In this dissertation are shown two example of dynamic hedge, the first is the strategy &quot;buy batterfly&quot; - rolling position, the second is the strategy &quot;byu condor&quot; where is shown method of delta-neutral hedging.</p>

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