Numerical Experiments on Hedging Cliquet Options
20 Pages Posted: 9 Jun 2016
Date Written: October 31, 2014
In this paper, we conduct pricing and hedging experiments in order to check whether simple stochastic volatility models are capable of capturing forward volatility and forward skew risks correctly. As a reference, we use the Bergomi model, which treats these risks accurately. The results of our experiments show that the cost of poor volatility modeling in the Heston model, the Barndorff-Nielsen–Shephard model and a variance-gamma model with stochastic arrival is too high when pricing and hedging cliquet options.
Keywords: cliquet options, hedging, stochastic volatility models
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