Financial Analytics of Inverse BTC Options in a Stochastic Volatility World

Bitcoin (BTC) has attracted a plethora of investors and professional traders and becomes an almost inevitable asset class in today's financial markets. Deribit, the largest exchange for crypto options, offers European-typed inverse options, which target to BTC in USD but have payoff denominated in BTC. However, analytical insights to inverse options remain scarce. The dynamics of the underlying BTC is well described by a stochastic volatility model but in pricing inverse options one meets numerical difficulties in calibration and hedging. Financial analytics for the practically useful stochastic volatility with correlated jumps model is provided and comparison with simpler nested models both in in-sample and out-of-sample pricing is given. A dynamic Delta hedging exercise yields that - surprisingly - the portfolio of nested models gives almost identical hedging errors