Post by congregatio on Mar 5, 2022 8:51:25 GMT 4
Hedging at-the-money digital options near maturity
14 Pages Posted: 9 Feb 2022
Augusto Blanc-Blocquel
Universitat Politècnica de Catalunya (UPC Barcelona Tech)
Luis Ortiz-Gracia
University of Barcelona
Rodolfo Oviedo
Universidad Austral; McGill University - Desautels Faculty of Management
Date Written: February 9, 2022
Abstract
Hedging at-the-money digital options near maturity, remains a challenge in quantitative finance. In the present work, we carry out a hedging strategy by means of a bull spread. We study the probability of super- and sub-hedge the digital option and minimize the probability of a sub-hedge considering the cost of hedging and illiquidity issues. We perform a wide variety of numerical experiments under different models for the underlying asset dynamics. A calibration to market data is provided and used to get the optimal composition of the bull spread satisfying the cost of hedging restriction.
SSRN-id4030581.pdf (402.68 KB)
14 Pages Posted: 9 Feb 2022
Augusto Blanc-Blocquel
Universitat Politècnica de Catalunya (UPC Barcelona Tech)
Luis Ortiz-Gracia
University of Barcelona
Rodolfo Oviedo
Universidad Austral; McGill University - Desautels Faculty of Management
Date Written: February 9, 2022
Abstract
Hedging at-the-money digital options near maturity, remains a challenge in quantitative finance. In the present work, we carry out a hedging strategy by means of a bull spread. We study the probability of super- and sub-hedge the digital option and minimize the probability of a sub-hedge considering the cost of hedging and illiquidity issues. We perform a wide variety of numerical experiments under different models for the underlying asset dynamics. A calibration to market data is provided and used to get the optimal composition of the bull spread satisfying the cost of hedging restriction.
SSRN-id4030581.pdf (402.68 KB)