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- Title
AN EXAMINATION OF THE EFFECTIVENESS OF STATIC HEDGING IN THE PRESENCE OF STOCHASTIC VOLATILITY.
- Authors
Fink, Jason
- Abstract
Toft and Xuan (1998) use simulation evidence to demonstrate that the static hedging method of Derman et al. (1995) performs inadequately when volatility is stochastic. Particularly, the greater the "volatility of volatility," the poorer the static hedge. This article presents an alternative static hedging methodology, denoted the generalized static hedge, that appears to perform more reliably. Specifically, the value, delta, and vega of the static hedges closely approximate those values of the barrier option being hedged. Further, simulation evidence indicates that when volatility of volatility is large, the standard deviation of simulated cash flows from the generalized static hedge position is less than the standard deviation of simulated cash flows from previously defined static hedge positions.
- Subjects
HEDGING (Finance); STOCHASTIC processes; MARKET volatility
- Publication
Journal of Futures Markets, 2003, Vol 23, Issue 9, p859
- ISSN
0270-7314
- Publication type
Article
- DOI
10.1002/fut.10089