TY - JOUR T1 - Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation JO - East Asian Journal on Applied Mathematics VL - 3 SP - 314 EP - 336 PY - 2018 DA - 2018/02 SN - 6 DO - http://doi.org/10.4208/eajam.010116.220516a UR - https://global-sci.org/intro/article_detail/eajam/10801.html KW - Delta-hedging errors, profit and loss distribution, discrete trading, jump-diffusion model, transaction cost. AB -

We introduce a new method to compute the approximate distribution of the Delta-hedging error for a path-dependent option, and calculate its value over various strike prices via a recursive relation and numerical integration. Including geometric Brownian motion and Merton’s jump diffusion model, we obtain the approximate distribution of the Delta-hedging error by differentiating its price with respect to the strike price. The distribution from Monte Carlo simulation is compared with that obtained by our method.