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arXiv · 1004.4526

Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy

Mats Brodén·Magnus Wiktorsson
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Abstract

Discrete time hedging in a complete diffusion market is considered. The hedge portfolio is rebalanced when the absolute difference between delta of the hedge portfolio and the derivative contract reaches a threshold level. The rate of convergence of the expected squared hedging error as the threshold level approaches zero is analyzed. The results hinge to a great extent on a theorem stating that the difference between the hedge ratios normalized by the threshold level tends to a triangular distribution as the threshold level tends to zero.

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Mats Brodén, Magnus Wiktorsson. 2010-04-26. Hedging Errors Induced by Discrete Trading Under an Adaptive Trading Strategy. https://arxiv.org/abs/1004.4526

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