Replication of financial instruments which compensate lower share prices
Replication of financial instruments which compensate lower share prices
Author(s): Leszek ZarembaSubject(s): Economy, Financial Markets
Published by: Instytut Nauk Ekonomicznych Polskiej Akademii Nauk
Keywords: replication error; hedging; approximate hedging; expected sum of squared replication errors; incomplete market; risk management
Summary/Abstract: In this paper our main goal is to demonstrate how listed companies can successfully defend themselves against falling share prices. We present a one-period model of the Polish financial market from the view point of KGHM. The ideas, notions, and tools presented in this article have high potential to be useful also to investment funds because the so-called replicating portfolios, when properly chosen, have negative prices and generate positive or zero income in all scenarios (states of the market). Financial instruments are represented here by vectors, while financial markets, by matrices. Having in mind that the stock price of KGHM declined from 126 PLN on April 15, 2015 to 57.50 PLN on January 15, 2016 and stayed at this level until May 15, 2016, we show how KGHM could create a financial instrument (with negative cost) which would fully compensate big potential declines of its share prices
Journal: Studia Ekonomiczne
- Issue Year: 2016
- Issue No: 3
- Page Range: 502-511
- Page Count: 10
- Language: English
