Listing of classical options and the pricing of discount certificates
Do new listings of EUREX options affect the prices of discount certificates that are replicated with precisely such a newly listed option? An event study provides a significantly negative average abnormal margin change on the day on which the EUREX option of the replication portfolio is listed. I model the abnormal margin changes as a function of hedging cost, unhedgeable risk, and price pressure. Higher hedging costs, higher opportunity costs from unhedgeable risk, and lower intra-EUWAX competition lead to significantly lower abnormal margin changes. I interpret the effect of intra-EUWAX competition as a price pressure effect. Economically, rebalancing and opportunity costs from unhedgeable risk are the most important drivers of abnormal margin changes when EUREX options are listed.
Schertler, A. (2021): Listing of classical options and the pricing of discount certificates, in: Journal of Banking & Finance, Vol. 123, pp. 1-16, doi: https://doi.org/10.1016/j.jbankfin.2020.106011.
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