Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation. Issue 3 (20th July 2016)

• Record Type: Journal Article
• Authors: Park, Minseok; Lee, Kyungsub; Choe, Geon Ho
• Is Part Of: East Asian journal on applied mathematics. Volume 6:Issue 3(2016)
• Page Start: 314
• Page End: 336
• Publication Date: 2016-07-20
• Subjects: 91G20, -- 91G60; Delta-hedging errors, -- profit and loss distribution, -- discrete trading, -- jump-diffusion model, -- transaction cost; Applied mathematics -- Periodicals; 519.05
• DOI: 10.4208/eajam.010116.220516a
• Languages: English
• ISSNs: 2079-7362

Abstract

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.