Financial Engineering Seminar
February, 13, 2004 (Fri)
3:00 PM - 3:50 PM(8th period),
Weil Hall, 307
Moment based Analysis of Portfolio Affine Hedging
This is joint work with Yuji Yamada of University of Tsukuba.
Abstract:
In this talk, we develop a lattice based approach to the analysis
of so-called portfolio affine dynamic hedging strategies. Portfolio affine
strategies are those that depend on the overall portfolio value in an
affine manner, and include standard Black-Scholes based delta hedging and
mean square optimal hedging for options. We develop an algorithm to
efficiently compute the moments of the hedging error on a lattice for a
portfolio affine strategy. This algorithm can be used to analyze hedging
strategies under discrete trading, and other market
incompleteness. Furthermore, we show that the underlying algorithm may be
extended to handle forms of transaction costs and scenario analysis,
providing a flexible and computationally feasible method of analyzing
important tradeoffs in hedging. We use the hedging of options to
illustrate the algorithms and results.