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 - <p style="text-align: justify;">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.</p>