Static hedging and model risk for barrier options

Morten Nalholm and Rolf Poulsen

Journal of Futures Markets, 2006, vol. 26, issue 5, 449-463

Abstract: The article investigates how sensitive different dynamic and static hedge strategies for barrier options are to model risk. It is found that using plain‐vanilla options to hedge offers considerable improvements over usual Δ hedges. Further, it is shown that the hedge portfolios involving options are relatively more sensitive to model risk, but that the degree of misspecification sensitivity is robust across commonly used models. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:449–463, 2006

Date: 2006
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