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Static hedging and model risk for barrier options
Author(s) -
Nalholm Morten,
Poulsen Rolf
Publication year - 2006
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20199
Subject(s) - hedge , econometrics , model risk , economics , sensitivity (control systems) , actuarial science , financial economics , risk management , engineering , finance , ecology , electronic engineering , biology
The article investigates how sensitive different dynamic and static hedge strategies for barrier options are to model risk. It is found that using plain‐vanilla options to hedge offers considerable improvements over usual Δ hedges. Further, it is shown that the hedge portfolios involving options are relatively more sensitive to model risk, but that the degree of misspecification sensitivity is robust across commonly used models. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:449–463, 2006