In this chapter, we have shown some practical problems that arise in the hedging of derivatives. Although the Black-Scholes-Merton model assumes continuous time trading, resulting in continuous rebalancing of the hedging portfolio without transaction costs, in reality, trading occurs in discrete time, and it does have costs. Consequently, the cost of hedging depends on the future path of the spot price of the underlying asset; thus, it is not a single value presented by the analytical formula any more, but it is a stochastic variable that can be described by its probability distribution. In this chapter, we simulated different paths, calculated the cost of hedging, and presented the probability distribution assuming different rebalancing frequencies. We received that in the absence of transaction costs the volatility reduces with the shortening of the rebalancing period. On the other hand, transaction costs can boost not only the expected value of the cost of the hedge but also its...
Mastering R for Quantitative Finance
Mastering R for Quantitative Finance
Overview of this book
Table of Contents (20 chapters)
Mastering R for Quantitative Finance
Credits
About the Authors
About the Reviewers
www.PacktPub.com
Preface
Free Chapter
Time Series Analysis
Factor Models
Forecasting Volume
Big Data – Advanced Analytics
FX Derivatives
Interest Rate Derivatives and Models
Exotic Options
Optimal Hedging
Fundamental Analysis
Technical Analysis, Neural Networks, and Logoptimal Portfolios
Asset and Liability Management
Capital Adequacy
Systemic Risks
Index
Customer Reviews