Hedging of Portfolios and Transaction costs
Hedging of Portfolios and Transaction costs

Author(s): Hana Florianová, Tomáš Dráb
Subject(s): Business Economy / Management, Financial Markets, Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: warrants; hedging; portfolio; transaction costs;
Summary/Abstract: The aim of this paper is to decide whether to rebalance hedged portfolios often to reduce risk or to rebalance them less often to lower transaction costs. In this paper we use delta-hedging for portfolios consisting of warrants and shares. We focus on how portfolio rebalancing works on real financial markets with an emphasis on situation on European stock exchanges. The motivation for this research is to gain knowledge for investing in real markets more effectively than just by using theoretical methods. In our research we achieved interesting results under the terms of transaction costs and different frequency of rebalancing portfolios. We constructed 30 portfolios consisting of American style plain vanilla call warrants and correspondent amount of underlying shares. We compared one week and two weeks period of rebalancing with no rebalancing. The results are that you pay more money on transaction costs to reduce one percent of risk as the rebalancing is more frequent.

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