Discrete-Time Quadratic Hedging of Barrier Options in Exponential Lévy Model

J. Kallsen and A. Papapantoleon (eds.), Advanced Modeling in Mathematical Finance, 257-275, Springer, 2016

19 Pages Posted: 15 Mar 2016 Last revised: 29 Sep 2019

See all articles by Aleš Černý

Aleš Černý

Cass Business School, City, University of London

Date Written: March 11, 2016

Abstract

We examine optimal quadratic hedging of barrier options in a discretely sampled exponential Lévy model that has been realistically calibrated to reflect the leptokurtic nature of equity returns. Our main finding is that the impact of hedging errors on prices is several times higher than the impact of other pricing biases studied in the literature.

Keywords: barrier options, quadratic hedging, Lévy model, asymptotics, calibration

JEL Classification: G11, G13

Suggested Citation

Černý, Aleš, Discrete-Time Quadratic Hedging of Barrier Options in Exponential Lévy Model (March 11, 2016). J. Kallsen and A. Papapantoleon (eds.), Advanced Modeling in Mathematical Finance, 257-275, Springer, 2016. Available at SSRN: https://ssrn.com/abstract=2746572 or http://dx.doi.org/10.2139/ssrn.2746572

Aleš Černý (Contact Author)

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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