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Static hedging and model risk for barrier options

✍ Scribed by Morten Nalholm; Rolf Poulsen

Publisher: John Wiley and Sons
Year: 2006
Tongue: English
Weight: 131 KB
Volume: 26
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20199

No coin nor oath required. For personal study only.

✦ Synopsis

The article investigates how sensitive different dynamic and static hedge strategies for barrier options are to model risk. It is found that using plainvanilla options to hedge offers considerable improvements over usual ⌬ hedges. Further, it is shown that the hedge portfolios involving options are relatively more sensitive to model risk, but that the degree of misspecification sensitivity is robust across commonly used models.

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