Hedging strategy in emerging market: Application long straddle option in gold price index

Riko Hendrawan, Fauzan Akbar, Sari Yuniarti

Abstract


This research was conducted to test the implementation of gold price index option contracts using the Black Scholes and GARCH models with a long straddle strategy. The testing is done by looking at the comparison of the results of the calculation from the historical volatility value and the GARCH volatility. The results of the study are displayed by looking at the comparison of the Average Mean-square Error (AMSE) percentage values of the two models. From the research that has been done, it shows that the Black Scholes model has a better gold price index option contract than the GARCH model for maturities of 1 month, 2 months and 3 months.This is shown from the AMSE value of call options and put options in the Black Scholes model which is always smaller than the GARCH model for each contract maturity period. In addition, the potential for maximum profit by implementing the long straddle strategy in gold price index option contracts in the range of 2008-2018 is 54.98 percent with an average profit potential of around 25-30 percent.

JEL Classification: G11, G12

DOI: https://doi.org/10.26905/jkdp.v24i4.4666

 


Keywords


Emerging market; Gold price; Option contract; Straddle strategy

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DOI: https://doi.org/10.26905/jkdp.v24i4.4666

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