Static versus dynamic hedges: an empirical comparison for barrier options |
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Authors: | Bernd Engelmann Matthias R Fengler Morten Nalholm Peter Schwendner |
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Institution: | (1) Quanteam AG, Helfmann-Park 10, 65760 Eschborn, Germany;(2) Sal. Oppenheim jr. & Cie., Trading & Derivatives, Frankfurt am Main, Germany;(3) Department of Mathematical Sciences, University of Copenhagen, Universitetsparken 5, 2100 Copenhagen, Denmark |
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Abstract: | We conduct an empirical comparison of static versus dynamic hedges of barrier options. Using more than five years of data,
we compare a number of static hedges from the literature with dynamic hedges based on the local volatility model. The main
result is that the variability of profit-and-loss distributions from certain static hedges is significantly smaller than that
of dynamic hedges and robust to changing market scenarios. Furthermore, these static hedges are able to provide a robust tracking
of barrier options’ sensitivities.
This article reflects the authors’ personal opinion and not necessarily the opinion of their employers. |
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Keywords: | Barrier options Static hedging Dynamic hedging Local volatility model Empirical hedging analysis |
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