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Distribution of Discrete Time Delta-Hedging Error via a Recursive Relation
Published online by Cambridge University Press: 20 July 2016
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.
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- Copyright © Global-Science Press 2016
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