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Hedging of Asian options under exponential Lévy models: computation and performance

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  • Laura Ballotta
  • Russell Gerrard
  • Ioannis Kyriakou

Abstract

In this paper we consider the problem of hedging an arithmetic Asian option with discrete monitoring in an exponential Lévy model by deriving backward recursive integrals for the price sensitivities of the option. The procedure is applied to the analysis of the performance of the delta and delta–gamma hedges in an incomplete market; particular attention is paid to the hedging error and the impact of model error on the quality of the chosen hedging strategy. The numerical analysis shows the impact of jump risk on the hedging error of the option position, and the importance of including traded options in the hedging portfolio for the reduction of this risk.

Suggested Citation

  • Laura Ballotta & Russell Gerrard & Ioannis Kyriakou, 2017. "Hedging of Asian options under exponential Lévy models: computation and performance," The European Journal of Finance, Taylor & Francis Journals, vol. 23(4), pages 297-323, March.
    • Handle: RePEc:taf:eurjfi:v:23:y:2017:i:4:p:297-323
    DOI: 10.1080/1351847X.2015.1066694
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    Cited by:

    1. Ning Cai & Yingda Song & Steven Kou, 2015. "A General Framework for Pricing Asian Options Under Markov Processes," Operations Research, INFORMS, vol. 63(3), pages 540-554, June.

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