This paper mainly discusses the American option’s hedging strategies via binomial model and the basic idea of pricing and hedging American option. Although the essential scheme of hedging is almost the same as European option, small differences may arise when simulating the process for American option holder has more rights, spelling that the option can be exercised at anytime before its maturi...

This paper analyzes the performance of two hedging strategies on three different options when trading is limited to take place at discrete times. Specifically, we compare the mean, standard deviation, skewness, and kurtosis of the hedging error resulting from applying a delta hedge and mean square optimal hedge to a European call option, a digital call option, and a down-and-out barrier call op...

We use asymptotic analysis to derive the optimal hedging strategy for an option portfolio hedged using an imperfectly correlated hedging asset with small transaction costs, both fixed per trade and proportional to the value traded. In special cases we opbtain explicit formulae. The hedging strategy involves holding a position in the hedging asset whose value lies between two bounds, which are i...

How should price models be chosen for real option valuation and how should real option cash flows be hedged in the presence of model error? We consider a specific type of model error in the context of the natural gas storage real option: The assumed number of factors in a multifactor futures price model differs from the true number of factors. In terms of valuation, model error does not seem to...

We consider hedging of a path-dependent European style option with convex continuous payoff in a discrete time incomplete market, where underlying stock price jumps are distributed over a bounded interval. The incompleteness of the market produces an interval of no-arbitrage option prices for the path-dependent option. Upper and lower bounds for the noarbitrage price interval are developed. Exp...

This work is devoted to the discrete time hedging of the American option on a dividendpaying stock with a convex payoff, the particular case of which is American call option. Perfect hedging requires continuous trading in time and knowledge of the partial derivative of the value function of the American option in the underlying asset. Neither one can trade continuously in time nor the closed-fo...

Estimation of a consistent volatility model of the underlying is crucial for option hedging. The authors illustrate that, compared to the implied/constant volatility method, a local volatility function method can estimate the underlying volatility from option prices more consistently. The result is more accurate hedge parameters and smaller hedging errors. The evidence provided includes an exam...

We investigate daily robust hedging performance with trading costs for markets of S&P 500 Index option (SPX) and Taiwan Index option (TXO). Robust hedging refers to minimal model dependence on the risky asset price. Two hedging categories including " model-free " and " volatility-model-free, " and nonparametric methods for volatility estimation are considered in our empirical study. In particul...