Hedging under alternative stickiness assumptions: an empirical analysis for barrier options

Does model fit matter for hedging? Evidence from FTSE 100 options

“…This guarantees consistency in the choice of the calibration objective function for all models considered in this study. 11 A similar approach, but based on the local volatility surface, has been adopted byEngelmann, Fengler, and Schwendner (2006).…”

Static hedges for reverse barrier options with robustness against skew risk: an empirical analysis

“…To compute the vega the implied volatility surface is shifted and the sensitivity is found by recalibration and a finite difference approximation. Engelmann et al (2008) find the DV hedge to be considerably better than a pure delta hedge and only slightly less effective than a delta-vega-vanna hedge. To hedge the delta and vega, positions are taken in the money market account, the spot and the ATM vanilla option with the same expiry as the barrier option.…”

“…The hedge performance of the LV model for the reverse barrier problem is analyzed in Engelmann et al (2008) who focus on the 'stickiness assumptions' on the implied volatility dynamics. When computing the sensitivity of the option price with respect to movements in the underlying three methods are frequently used in practice.…”

“…Stickiness assumptions are ad-hoc ways to capture the dynamics of the implied volatility surface. One main result of Engelmann et al (2008) is that the sticky-strike assumption is superior to the others, but differences are small when a vega hedge is added to the hedge portfolio.…”

“…the volatility parameter in the BS model. The empirical performance of dynamic hedging of reverse barrier options using the LV model and hedging higher order sensitivities is investigated in Engelmann, Fengler & Schwendner (2008).…”