Hedging European and Barrier options using stochastic optimization

Hedging European and Barrier options using stochastic optimization

We hedge European and Barrier options in a discrete time and discrete space setting by uwing stochastic optimization to minimize the mean downside hedge error under transaction costs. Scenario trees are generated using a method which ensures the absence of arbitrage and which matches the mean and va...

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Veröffentlicht in:Quantitative finance 2004-10, Vol.4 (5), p.549-557
1. Verfasser: Villaverde, Michael
Format: Artikel
Sprache:eng
Schlagworte:
Brownian motion
Hedging
Optimization
Options trading
Prices
Stochastic models
Studies
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creator Villaverde, Michael
description We hedge European and Barrier options in a discrete time and discrete space setting by uwing stochastic optimization to minimize the mean downside hedge error under transaction costs. Scenario trees are generated using a method which ensures the absence of arbitrage and which matches the mean and variance of the underlying asset price in the sampled scenarios to those of a given distribution. The stochastic optimization based strategy is benchmarked to the method of delta hedging for the case where the underlying asset price following a discretized geometric Brownian motion and implemented for the case where the underlying asset prices is driven by a discretized Variance Gamms proces.
doi_str_mv 10.1080/14697680400000037
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source Taylor & Francis; RePEc; Business Source Complete
subjects Brownian motion
Hedging
Optimization
Options trading
Prices
Stochastic models
Studies
title Hedging European and Barrier options using stochastic optimization
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