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
Date Written: March 11, 2016
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: Suggested Citation