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International Conference on Statistics, Combinatorics and Related Areas and the Eighth International Conference of Forum for Interdisciplinary Mathematics
December 19-21, 2001
School of Mathematics and Applied Statistics, University of Wollongong
Wollongong, NSW, Australia

Organizers
Satya N. Mishra (University of South Alabama), Chandra M. Gulati (University of Wollongong)

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Dispersion Trading - Arbitraging Equity Index Options with Equity Stock Options
by
Thomas Gillespie
Salomon Smith Barney Australia Securities Pty. Limited

The theory of arbitraging equity index options with a basket of individual equity options, also known as dispersion trading, has a number of theoretical and practical appeals. While a strict arbitrage lower bound exists, minimal variance hedging can be used to construct tracking baskets of options to capitalise on the mispricing of the two different volatility markets which arises from time to time. Minimal variance hedging, or the hedging the gamma of one derivative with the gamma of other derivatives, is widely applicable to many derivative hedging problems such as hedging options on baskets of securities. The talk will emphasize realistic applications and problems through practical examples of Australian and international dispersion trading.

Date received: November 26, 2001

Copyright © 2001 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # caim-18.