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    Dynamic hedging of financial instruments when the underlying follows a Non-Gaussian Process

    Cartea, Alvaro (2005) Dynamic hedging of financial instruments when the underlying follows a Non-Gaussian Process. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    Traditional dynamic hedging strategies are based on local information (ie Delta and Gamma) of the financial instruments to be hedged. We propose a new dynamic hedging strategy that employs non-local information and compare the profit and loss (P&L) resulting from hedging vanilla options when the classical approach of Delta- and Gammaneutrality is employed, to the results delivered by what we label Delta- and Fractional-Gamma-hedging. For specific cases, such as the FMLS of Carr and Wu (2003a) and Merton’s Jump-Diffusion model, the volatility of the P&L is considerably lower (in some cases only 25%) than that resulting from Delta- and Gamma-neutrality.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0508
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 05 Apr 2019 08:27
    Last Modified: 03 Aug 2019 14:40
    URI: http://eprints.bbk.ac.uk/id/eprint/27035

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