Static versus dynamic hedges: an empirical comparison for barrier options

Abstract

Barrier options, Static hedging, Dynamic hedging, Local volatility model, Empirical hedging analysis, G13,

Robust Hedging of Double Touch Barrier Options

“…In addition, since some of the hedging portfolios can involve a large number of options, it is not clear that the static hedges here will be efficient at resolving the issues of transaction costs (and operational simplicity) or model risk. A numerical investigation of the performance of a range of these options in practice has been conducted in [EFNS06], and similar investigations for a different class of static hedges appear in [DST01,Tom97].…”

Auto-static for the people: risk-minimizing hedges of barrier options

“…Empirical analysis. Engelmann et al (2007), An and Suo (2009), Carr and Wu (2008) all find advantages to using plain vanilla options in hedge portfolios, and that is even based on constructions to which the hedges suggested in this paper are superior. Since market data for barrier option prices are not available all the empirical methodologies involve some elements of "marking-to-model."…”

An Empirical Comparison of Option‐Pricing Models in Hedging Exotic Options

“…The delta and gamma of the option become large in absolute values near expiration when the asset price is close to the barrier. A trader who adopts the delta hedging strategy would take large short (or long) positions in the underlying asset and make large adjustments to the hedging portfolio (Engelmann, Fengler, Nalholm, and Schwendner, 2006). This will cause the hedging strategy to be very risky.…”