Minimal Variance Hedging of Options with Student-t Underlying

Details Minimal Variance Hedging of Options with Student-t Underlying Minimal Variance Hedging of Options with Student-t Underlying

1999-07-27

arxiv.org/abs/cond-mat/9907421v2

Physics

Condensed Matter

Statistical Mechanics

some references added, version to appear in Physica A 276 (2000) 581

Scientific paper

10.1016/S0378-4371(99)00498-7

I explicitly work out closed form solutions for the optimal hedging
strategies (in the sense of Bouchaud and Sornette) in the case of European call
options, where the underlying is modeled by (unbiased) iid additive returns
with Student-t distributions. The results may serve as illustrative examples
for option pricing in the presence of fat tails.

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