Pricing, Hedging and Avalysis of Taiwanese Bull/Bear Warrants Within the Double Exponential Jump Model(2/2)

The trading volume of Warrants in Hong Kong is largest among the global warrant markets and more than50% of the warrants traded in Hong Kong markets are turbo warrants. Therefore, the turbo warrant of HongKong is a very important financial derivative. Based on the successful experience in Hong Kong, TaiwanStock Exchange Corporation (TWSE) designed the Taiwanese Callable bull/bear warrants and launchedthem into the security market in July, 2011. However, the provisions of the mandatory call event and thecomputation of the settlement price of the Taiwanese Callable bull/bear warrants are different from those ofthe Hong Kong turbo warrants, and thus, the literature on pricing and hedging of the Taiwanese Callablebull/bear warrants is sparse. To fill this gap, the first-year project intends to derive the pricing formulas ofthe Taiwanese Callable bull/bear warrants within three different settings of the market model and thenexamine their accuracy based on the Monte Carlo simulations. In addition, we also derive their hedgingparameters and then develop the efficient hedging method for the Taiwanese Callable bull/bear warrants.The second-year project will examine the reasonableness of the prices at which Taiwanese Callablebull/bear warrants are sold in Taiwan. Lastly, we will examine the effects of the Mandatory Call Events(MCEs) of Taiwan Bull/Bear warrants on the underlying stocks and find whether there exists the pricemanipulation of the underlying stocks.