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Nonconvergence in the Variation of the Hedging Strategy of a European Call Option

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  • R. Th. Peters

Abstract

In this paper we consider the variation of the hedging strategy of a European call option when the underlying asset follows a binomial tree. In a binomial tree model the hedging strategy of a European call option converges to a continuous process when the number of time points increases so that the price process of the underlying asset converges to a Brownian motion, the Bachelier model. However, the variation of the hedging strategy need not converge to the variation of the limit process. In fact, it is shown that the asymptotic variation of the hedging strategy may be of any order.

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  • R. Th. Peters, 2003. "Nonconvergence in the Variation of the Hedging Strategy of a European Call Option," Mathematical Finance, Wiley Blackwell, vol. 13(4), pages 467-480, October.
    • Handle: RePEc:bla:mathfi:v:13:y:2003:i:4:p:467-480
    DOI: 10.1111/1467-9965.t01-1-00176
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