Numerical Experiments on Hedging Cliquet Options

20 Pages Posted: 9 Jun 2016

See all articles by Fiodar Kilin

Fiodar Kilin

Frankfurt School of Finance & Management

Morten Nalholm

Copenhagen Business School - Department of Finance

Uwe Wystup

MathFinance AG; Frankfurt School

Date Written: October 31, 2014

Abstract

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

Suggested Citation

Kilin, Fiodar and Nalholm, Morten and Wystup, Uwe, Numerical Experiments on Hedging Cliquet Options (October 31, 2014). Journal of Risk, Vol. 17, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2791441

Fiodar Kilin (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.frankfurt-school.de

Morten Nalholm

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Uwe Wystup

MathFinance AG ( email )

Schiesshohl 19
Waldems, 65529
Germany
+4970062843462 (Phone)
+4970062843462 (Fax)

HOME PAGE: http://www.mathfinance.com

Frankfurt School ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.frankfurt-school.de

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