Optimal Static Quadratic Hedging
Tim Leung () and
Papers from arXiv.org
We propose a flexible framework for hedging a contingent claim by holding static positions in vanilla European calls, puts, bonds, and forwards. A model-free expression is derived for the optimal static hedging strategy that minimizes the expected squared hedging error subject to a cost constraint. The optimal hedge involves computing a number of expectations that reflect the dependence among the contingent claim and the hedging assets. We provide a general method for approximating these expectations analytically in a general Markov diffusion market. To illustrate the versatility of our approach, we present several numerical examples, including hedging path-dependent options and options written on a correlated asset.
New Economics Papers: this item is included in nep-fmk and nep-rmg
Date: 2015-06, Revised 2015-11
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Journal Article: Optimal static quadratic hedging (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1506.02074
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