Advanced Search
MyIDEAS: Login to save this article or follow this journal

Hedging Large Portfolios of Options in Discrete Time

Contents:

Author Info

  • B. Peeters
  • C. L. Dert
  • A. Lucas

Abstract

The problem studied is that of hedging a portfolio of options in discrete time where underlying security prices are driven by a combination of idiosyncratic and systematic risk factors. It is shown that despite the market incompleteness introduced by the discrete time assumption, large portfolios of options have a unique price and can be hedged without risk. The nature of the hedge portfolio in the limit of large portfolio size is substantially different from its continuous time counterpart. Instead of linearly hedging the total risk of each option separately, the correct portfolio hedge in discrete time eliminates linear as well as second and higher order exposures to the systematic risk factors only. The idiosyncratic risks need not be hedged, but disappear through diversification. Hedging portfolios of options in discrete time thus entails a trade-off between dynamic and cross-sectional hedging errors. Some computations are provided on the outcome of this trade-off in a discrete-time Black-Scholes world.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860701718471
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 15 (2008)
Issue (Month): 3 ()
Pages: 251-275

as in new window
Handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:251-275

Contact details of provider:
Web page: http://www.tandfonline.com/RAMF20

Order Information:
Web: http://www.tandfonline.com/pricing/journal/RAMF20

Related research

Keywords: Option hedging; discrete time; preference free valuation; hedging errors; cross-sectional hedging; static hedging; JEL Codes: G13; G12;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:251-275. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.