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 Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 05 Apr 2019 08:27 |
| Last Modified: | 02 Aug 2023 17:50 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/27035 |
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