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Volume 6, Issue 3
Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation

Minseok Park, Kyungsub Lee & Geon Ho Choe

DOI: 10.4208/eajam.010116.220516a

East Asian J. Appl. Math., 6 (2016), pp. 314-336.

Published online: 2018-02

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  • Abstract

We introduce a new method to compute the approximate distribution of the Delta-hedging error for a path-dependent option, and calculate its value over various strike prices via a recursive relation and numerical integration. Including geometric Brownian motion and Merton’s jump diffusion model, we obtain the approximate distribution of the Delta-hedging error by differentiating its price with respect to the strike price. The distribution from Monte Carlo simulation is compared with that obtained by our method.

  • Keywords

Delta-hedging errors, profit and loss distribution, discrete trading, jump-diffusion model, transaction cost.

  • AMS Subject Headings

91G20, 91G60

  • Copyright

COPYRIGHT: © Global Science Press

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@Article{EAJAM-6-314, author = {Minseok Park, Kyungsub Lee and Geon Ho Choe}, title = {Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation}, journal = {East Asian Journal on Applied Mathematics}, year = {2018}, volume = {6}, number = {3}, pages = {314--336}, abstract = {

We introduce a new method to compute the approximate distribution of the Delta-hedging error for a path-dependent option, and calculate its value over various strike prices via a recursive relation and numerical integration. Including geometric Brownian motion and Merton’s jump diffusion model, we obtain the approximate distribution of the Delta-hedging error by differentiating its price with respect to the strike price. The distribution from Monte Carlo simulation is compared with that obtained by our method.

}, issn = {2079-7370}, doi = {https://doi.org/10.4208/eajam.010116.220516a}, url = {http://global-sci.org/intro/article_detail/eajam/10801.html} }
TY - JOUR T1 - Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation AU - Minseok Park, Kyungsub Lee & Geon Ho Choe JO - East Asian Journal on Applied Mathematics VL - 3 SP - 314 EP - 336 PY - 2018 DA - 2018/02 SN - 6 DO - http://doi.org/10.4208/eajam.010116.220516a UR - https://global-sci.org/intro/article_detail/eajam/10801.html KW - Delta-hedging errors, profit and loss distribution, discrete trading, jump-diffusion model, transaction cost. AB -

We introduce a new method to compute the approximate distribution of the Delta-hedging error for a path-dependent option, and calculate its value over various strike prices via a recursive relation and numerical integration. Including geometric Brownian motion and Merton’s jump diffusion model, we obtain the approximate distribution of the Delta-hedging error by differentiating its price with respect to the strike price. The distribution from Monte Carlo simulation is compared with that obtained by our method.

Minseok Park, Kyungsub Lee and Geon Ho Choe. (2018). Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation. East Asian Journal on Applied Mathematics. 6 (3). 314-336. doi:10.4208/eajam.010116.220516a
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