A Study on Taking Exchange Traded Funds as a Substitute Hedging Object for Stock of Warrants

• Main Authors: Tsung-Kai Yen, 顏宗楷
• Other Authors: Dr. Ming-Guan Huang
• Format: Others
• Language: zh-TW
• Published: 2012
• Online Access: http://ndltd.ncl.edu.tw/handle/13485527189885738863

碩士 === 實踐大學 === 財務金融與保險研究所 === 100 === It is essential that securities dealers should adopt suitable hedging strategies to avoid the risks of potential losses, which might result from the changing of stock price, after selling put warrants or warrants. During the progress of hedging, the most majority of securities dealers nearly all adopt the methods of buying proper position of stocks and regularly adjusting the positions of stocks to establish the delta neutral portfolio. However, owing to insufficient trading volumes and liquidities of individual stocks in practice, these may result in both greater bid-ask spread and higher stock price volatility; moreover, the trading may not be successful under the price-limit circumstances. Conclusively, the results of hedging may be influenced by unsuccessful trading or high trading costs while purchasing and selling the established or adjusted positions of stocks. Therefore, this study brings up an innovative idea of taking Exchange Traded Funds (ETF) as underlying stocks and develops a substitute model of hedging strategy model based on the relativities of price changing of warrants respectively with underlying stocks and ETF. There are at least three advantages of using ETF rather than stocks. First of all, ETF is so popular that there is nearly no problems of liquidity; therefore, the frictional costs can be decreased dramatically. Secondly, the price volatility of ETF is much lower than individual stocks’ due to the reason that specific stock market index of ETF is a stock portfolio, and in consequence the price-limit circumstance is rarely found. Lastly, a great amount of trading fee could be saved owing to the taxation ratio of selling ETF is farther lower than that of stocks’. In this study, Taiwan 50 ETF will be taken as a substitute hedging stock; additionally, there are 150 samples which are randomly selected from put warrants and warrants. In order to come up with the number of positions that each warrant holds, regression analysis and β coefficient of GARCH (1,1) estimated model will be used in analytic process. Since the average substitute hedging error about 18% and 12% respectively for overall warrant sample and warrant sample only including between 0.8 and 1.2,and thus the study idea is positively proved by the empirical results, this study will be highly recommended to those securities dealers which launch warrants as a referral.