Tuesday, May 13, 2008

Hedging Error and Discretising Continuous Time Models


Hedging error need not always need to be minimized. If it is favorable, it is advantages to let it be large as possible. The discretising of a continuous time model should be done so that the hedging error would be most favorable subjected to trading costs and other considerations. This would be a additional source of returns beyond what the model specifies.

Suminda Sirinath Salpitikorala Dharmasena

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