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Do we understand delta hedging?

Author

Listed:
  • Daniel Badagnani

    (Universidad Nacional de La Plata)

Abstract

We show that the delta-hedged portfolio is not actually risk-free even for brownian underlying due to history dependence in the ammount of hold portfolio. We find this ammount explicitly, as a function of underlying price evolution and option price. This shows that even in the B-S world (perfect market and brownian asset price evolution) the B-S equation can only be an approximation.

Suggested Citation

  • Daniel Badagnani, 2004. "Do we understand delta hedging?," Finance 0408008, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0408008
    Note: Type of Document - pdf; pages: 4
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    File URL: http://econwpa.repec.org/eps/fin/papers/0408/0408008.pdf
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    Keywords

    hedging; Black Scholes;

    JEL classification:

    • G - Financial Economics

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