Option pricing and hedging with minimum local expected shortfall

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We propose a versatile Monte-Carlo method for pricing and hedging options when the market is incomplete, for an arbitrary risk criterion (chosen here to be the expected shortfall), for a large class of stochastic processes, and in the presence of transaction costs. We illustrate the method on plain vanilla options when the price returns follow a Student-t distribution. We show that in the presence of fat-tails, our strategy allows to significantly reduce extreme risks, and generically leads to low Gamma hedging. Similarly, the inclusion of transaction costs reduces the Gamma of the optimal strategy.
23 pages, 7 figures, 8 tables

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Condensed Matter

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http://salesiana.dossiersoluciones.com/handle/123456789/22098

Consulte el texto completo en el siguiente enlace:

https://arxiv.org/abs/cond-mat/0308570
 http://arxiv.org/abs/cond-mat/0308570

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arXiv