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Explicit formulas for the minimal variance hedging strategy in a martingale case

  • Flavio Angelini
  • Stefano Herzel

We explicitly compute the optimal strategy in discrete time for a European option and the variance of the corresponding hedging error under the hypothesis that the underlying is a martingale following a Geometric Brownian motion.

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Paper provided by Università di Perugia, Dipartimento Economia in its series Quaderni del Dipartimento di Economia, Finanza e Statistica with number 35/2007.

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Length: 22
Date of creation: 15 Aug 2007
Date of revision:
Handle: RePEc:pia:wpaper:35/2007
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  1. Flavio Angelini & Stefano Herzel, 2007. "Measuring the error of dynamic hedging: a Laplace transform approach," Quaderni del Dipartimento di Economia, Finanza e Statistica 33/2007, Università di Perugia, Dipartimento Economia.
  2. Friedrich Hubalek & Jan Kallsen & Leszek Krawczyk, 2006. "Variance-optimal hedging for processes with stationary independent increments," Papers math/0607112, arXiv.org.
  3. Flavio Angelini & Marco Nicolosi, 2010. "On the Effect of Skewness and Kurtosis Misspecification on the Hedging Error," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 39(3), pages 203-226, November.
  4. Toft, Klaus Bjerre, 1996. "On the Mean-Variance Tradeoff in Option Replication with Transactions Costs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(02), pages 233-263, June.
  5. Figlewski, Stephen, 1989. " Options Arbitrage in Imperfect Markets," Journal of Finance, American Finance Association, vol. 44(5), pages 1289-1311, December.
  6. Primbs, James A. & Yamada, Yuji, 2006. "A moment computation algorithm for the error in discrete dynamic hedging," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 519-540, February.
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