Designing a systematic market making framework with a statically hedged uncertain volatility model and optimal volatility range
Carregando...
Arquivos
Data
2023-07-30
Autores
Orientador(res)
Maiali, André Cury
Métricas
Título da Revista
ISSN da Revista
Título de Volume
Resumo
This work aims to build a framework that applies the Uncertain Volatility Model alongside Static Hedging to generate competitive markets for European-style options systematically. The framework requires a reference price (Vref ) as an input parameter and then instructs the Market Maker on how to reach this price with the broadest volatility range possible. The equation governing the Uncertain Volatility Model is non-linear, which means that the price of a portfolio of N options is not necessarily a linear combination of the prices of each option present in such portfolio. The reasoning behind the framework is to explore this non-linearity by applying Optimal Static Hedging, that is, adding a set of options to the portfolio that either maximizes or minimizes the price at which the Market Maker can buy or sell the target option - the option requested by the customer. This work also applied Monte Carlo simulations and back-tests to measure the frameworks performance, measuring the frequency and magnitude of its profits. A result is deemed adequate when the volatility range is broad and the obtained price is close to the reference price. In summary, this work produced a framework that, given specific input parameters, instructs the Market Maker on how to optimally allocate a Static Hedging portfolio such that the volatility band is as broad as possible and the obtained price is close to the reference price.