MANAGING EQUITY RISK BY THE USE OF OPTIONS IN SAUDI STOCK MARKET

Abstract

Risk management is a crucial segment of any effective method of trading on the stock market. The main objective of risk management is to ensure that capital is used wisely, and profit is made, thus mitigating any losses. There are many financial instruments used to manage the risk, options are one of them. Over the last years, Saudi stock market has been more volatile. This extreme volatility makes it hard to invest for the future. This work has studied the impact of introducing of options in Saudi stock market. To see how investors and financial institution in Saudi Arabia can hedge their equity risk, Black-Scholes model was used to calculate the option price, call and put. Five listed stocks from Tadawul All Share Index (TASI) were selected, each from different sectors. The results have shown that four out of the five selected stocks show that the application of put option is more relevant in hedging the risk, while the fifth stock shows that the application of call option is more relevant.