THE BEST HEDGING STRATEGY IN THE PRESENCE OF TRANSACTION COSTS

Valeri Zakamouline ()
Additional contact information
Valeri Zakamouline: Faculty of Economics, University of Agder, Service Box 422, 4604 Kristiansand, Norway

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 06, 833-860

Abstract: Considerable theoretical work has been devoted to the problem of option pricing and hedging with transaction costs. A variety of methods have been suggested and are currently being used for dynamic hedging of options in the presence of transaction costs. However, very little was done on the subject of an empirical comparison of different methods for option hedging with transaction costs. In a few existing studies the different methods are compared by studying their empirical performances in hedging only a plain-vanilla short call option. The reader is tempted to assume that the ranking of the different methods for hedging any kind of option remains the same as that for a vanilla call. The main goal of this paper is to show that the ranking of the alternative hedging strategies depends crucially on the type of the option position being hedged and the risk preferences of the hedger. In addition, we present and implement a simple optimization method that, in some cases, improves considerably the performance of some hedging strategies.

Keywords: Option hedging; transaction costs; simulations; risk-return tradeoff; optimization (search for similar items in EconPapers)
Date: 2009
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024909005488
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:12:y:2009:i:06:n:s0219024909005488

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024909005488

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().