Delta hedging in discrete time under stochastic interest rate

作者：Angelini Flavio^*; Herzel Stefano

来源：Journal of Computational and Applied Mathematics, 2014, 259: 385-393.

DOI：10.1016/j.cam.2013.06.022

• Laplace transform
• Incomplete markets
• Delta hedging
• Contingent claim
• Stochastic interest rates

We propose a methodology based on the Laplace transform to compute the variance of the hedging error due to time discretization for financial derivatives when the interest rate is stochastic. Our approach can be applied to any affine model for asset prices and to a very general class of hedging strategies, including Delta hedging. We apply it in a two-dimensional market model, obtained by combining the models of Black-Scholes and Vasicek, where we compare a strategy that correctly takes into account the variability of interest rates to one that erroneously assumes that they are deterministic. We show that the differences between the two strategies can be very significant. The factors with stronger influence are the ratio between the standard deviations of the equity and that of the interest rate, and their correlation. The methodology is also applied to study the Delta hedging strategy for an interest rate option in the Cox-Ingersoll and Ross model, measuring the variance of the hedging error as a function of the frequency of the rebalancing dates. We compare the results obtained to those coming from a classical Monte Carlo simulation.

• 出版日期2014-3-15
• 单位Perugia