Tackling Investment Risks Using Equity Options During Extreme Economic Upheavals: Indian Evidence

Abstract

The study is an empirical scrutiny on the Indian equity options market to examine whether it facilitates the reduction of investment risks, focusing on an economic sphere with financial upheavals. The risk mitigation ability is examined with respect to the integration of near- month call and put options markets having different levels of exercisability with the equity market in the National Stock Exchange of India. The optimal size of options contracts required for establishing a hedge portfolio that minimises the risk exposure to a maximum possible magnitude and the level of gains resulting from such hedges are identified following the minimum variance approach, using Diagonal BEKK GARCH. The results indicate that ATM, ITM, and DITM call options and ATM, OTM, DOTM, and DITM put options provide effective risk reduction that can be efficiently utilised by the existing as well as prospective investors in the equity market.

Keywords

• optimal risk reduction
• minimum variance hedge ratio
• financial upheavals
• diagonal bekk garch model
• indian equity options market