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zequant
Topic Author
Posts: 18
Joined: December 5th, 2019, 7:50 pm

Discrete Hedging

August 22nd, 2022, 10:13 am

Hi all,

does anybody know some good references for theoretical results on hedging at finite intervals, e.g. at fixed move of the underlying (absolute or relative) or optimally given a fixed number of allowed rehedges? Anything in that vein.

Thanks! 
 
User avatar
DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Re: Discrete Hedging

August 22nd, 2022, 2:34 pm

There is a large literature on this. The math can get messy trying to change more than one thing at a time.
 
Imho a more flexible and effective way to deep learn delta hedging is to conduct experiments using simulation techniques where the hedging interval is a parameter. Simulate price paths for your favourite option underlying per the convenient world of theory and prove to yourself that a delta-hedged option position on average earns zero profit. You can see what happens in the theoretical world case when you shorten the hedge interval. Then start introducing the inconveniences of reality (e.g. transactions costs, market trending, stochastic vol, etc.) and see what happens. 
 
The guts of a simulation engine for delta hedging (with at least one obvious error) can be found at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=991344. Someone else can probably suggest a cleaner reference,. You'll want to output the standard deviation of the hedge error as well, for example.
 
zequant
Topic Author
Posts: 18
Joined: December 5th, 2019, 7:50 pm

Re: Discrete Hedging

August 23rd, 2022, 11:00 am

Thanks for that. I was really hoping for some theoretical results, for example comparing
1. constant move
2. constant % move
3. constant time interval
4. inverse gamma
type rehedge strategies.  
 
User avatar
Paul
Posts: 6604
Joined: July 20th, 2001, 3:28 pm

Re: Discrete Hedging

August 23rd, 2022, 2:05 pm

PWOQF2