Bridge over ocean
1 July 1994 Financial Analysts Journal Volume 50, Issue 4

S&P 500 Hedging Costs: A Look Over Time and Market Environments

  1. Joanne M. Hill, PhD
  2. Hardy Hodges
Put options struck 5% out of the money with three and six-month terms provide the basis for an examination of the up-front cost of S&P 500 put option and zero-premium collar hedging strategies. Put hedging costs show significant variability over time and market conditions. Put hedges tend to be most expensive in periods of declining markets with high levels of implied volatility; implied volatility serves as a good proxy for put hedging costs over time. Movements in implied volatility tend to offset the effect of interest rate changes on put costs. This is because low interest rates generally mean low volatility. Interest rates (relative to dividend yields) and the spread between put and call volatilities are the primary factors determining the tightness of zero-premium collars.
Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content
Publisher Information
Association for Investment Management and Research 7 pages doi.org/10.2469/faj.v50.n4.69 ISSN/ISBN: 0015-198X

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.