Year: 2016
East Asian Journal on Applied Mathematics, Vol. 6 (2016), Iss. 3 : pp. 314–336
Abstract
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.
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Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.4208/eajam.010116.220516a
East Asian Journal on Applied Mathematics, Vol. 6 (2016), Iss. 3 : pp. 314–336
Published online: 2016-01
AMS Subject Headings:
Copyright: COPYRIGHT: © Global Science Press
Pages: 23
Keywords: Delta-hedging errors profit and loss distribution discrete trading jump-diffusion model transaction cost.