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DOI 10.35609/jfbr.2023.7.4(2)

Reference to this paper should be made as follows: Hendrawan, R; Arifin, Z. (2023). Comparison of Black-Scholes and GARCH Option Models on The Jakarta Islamic Index with Collar Strategy, J. Fin. Bank. Review, 7(4), 16 – 27. https://doi.org/10.35609/jfbr.2023.7.4(2)

Received: January 26, 2023 | Accepted: March 31, 2023

Comparison of Black-Scholes and GARCH Option Models on The Jakarta Islamic Index with Collar Strategy
Riko Hendrawan , Zainal Arifin
Telkom University, Gegerkalong, 40152, Bandung, Indonesia Abstract

Objective - The revival of the Islamic economy in Indonesia was marked by the establishment of the Jakarta Islamic Index (JII) on July 3, 2000. From 2000 to 2020, two economic crises hit Indonesia in 2008 and 2020. These crises also had an impact on the high price fluctuations of JII. Assets can be protected from significant losses by hedging. One of the hedging strategies was option contracts with a collar strategy.

Methodology – The data analysed in this research were the JII closing price data from 2000 to 2020 using the Black Scholes model and the GARCH model with the Collar strategy.

Findings – Option with the Collar strategy provided more benefits in crises than without Option. In crisis conditions, the Option with the GARCH method and the collar strategy provided a higher average profit of 3.07% on the one-month Option and 7.01% on the three-month Option than without using the Option with the collar strategy. In non-crisis conditions, the Option using the GARCH method, and the collar strategy provided a 0.16% higher average profit at one-month maturity than without the Option. Meanwhile, the average profit decreased by 1.45% at the three-month maturity. The collar strategy resulted in less volatility. Without a collar strategy, JII volatility was 103%. The collar strategy produced maximum volatility of 12.71%, 15.18%, and 17.14%. The findings also revealed that the GARCH model was better than the Black Scholes based on the AMSE value obtained in crisis conditions with a maturity of one month and three months and in non-crisis conditions with a maturity of one month. Meanwhile, the Black Scholes model showed better results in non-crisis conditions with a maturity of three months.

Novelty – Based on the research result, the Option with a collar strategy is effective for hedging in crisis conditions. This research assesses the collar strategy with several different maturity values to get the most effective value.

Type of Paper - Empirical

Keywords: Black Scholes; Collar Strategy; GARCH; Jakarta Islamic Index; Option Contracts.

JEL Classification: G11, G13.

URI: http://gatrenterprise.com/GATRJournals/JFBR/vol7.4_2.html

DOI: https://doi.org/10.35609/jfbr.2023.7.4(2)

Pages 16 – 27

Price: USD 25