Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy

Details Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy

2010-04-26

arxiv.org/abs/1004.4526v1

Economy

Quantitative Finance

Risk Management

15 pages

Scientific paper

Discrete time hedging in a complete diffusion market is considered. The hedge portfolio is rebalanced when the absolute difference between delta of the hedge portfolio and the derivative contract reaches a threshold level. The rate of convergence of the expected squared hedging error as the threshold level approaches zero is analyzed. The results hinge to a great extent on a theorem stating that the difference between the hedge ratios normalized by the threshold level tends to a triangular distribution as the threshold level tends to zero.

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