Model risk and discretisation of locally risk-minimising strategies

Abstract. We consider a price process model driven by jump-diffusion and study the discretisation and simulation of the related locally risk-minimizing strategy where we focus mainly on hedging Asian and spread options. Using the discretisation scheme and the convergence results on backward stochastic differential equations as studied in Khedher and Vanmaele [17], we show that the locally risk-minimizing strategies are robust towards the choice of the model and we derive an estimation of the model risk. We present different numerical examples to illustrate our results.