To empirically establish the economic value of risk reduction using delta and gamma hedging in Indian capital markets

Abstract

The derivatives market has become an essential component of the global economic and financial system. And the case is not very different in Indian capital markets after over four years of introduction of derivatives in the markets. As on date, the derivatives are available on 120 securities, and this number will keep on increasing in the future, leading to more liquidity in the market. The value of derivatives portfolio is exposed to the price changes of individual underlying assets. This project intends to find the economic value added by hedging for these price changes by taking historical data on Nifty options. The options traded in Indian markets are European options, i.e. can be exercised only on the expiry date. For the purpose of the project, the data taken are the End of the Day prices of the derivatives and the securities involved. The empirical analysis id done by taking one option at a time but it can be extended to a portfolio consisting of multiple options.