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Optimal partial hedging of options with small transaction costs
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Whalley, A. Elizabeth (2011) Optimal partial hedging of options with small transaction costs. Journal of Futures Markets, Vol.31 (No.9). pp. 855-897. doi:10.1002/fut.20498 ISSN 0270-7314.
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Official URL: http://dx.doi.org/10.1002/fut.20498
Abstract
This study uses asymptotic analysis to derive optimal hedging strategies for option portfolios hedged using an imperfectly correlated hedging asset with small fixed and/or proportional transaction costs, obtaining explicit formulae in special cases. This is of use when it is impractical to hedge using the underlying asset itself. The hedging strategy holds a position in the hedging asset whose value lies between two bounds, which are independent of the hedging asset's current value. For low absolute correlation between hedging and hedged assets, highly risk-averse investors and large portfolios, hedging strategies and option values differ significantly from their perfect market equivalents.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance Q Science > QA Mathematics |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Options (Finance), Hedging (Finance), Transaction costs, Asymptotic distribution (Probability theory) | ||||
Journal or Publication Title: | Journal of Futures Markets | ||||
Publisher: | John Wiley & Sons Ltd. | ||||
ISSN: | 0270-7314 | ||||
Official Date: | September 2011 | ||||
Dates: |
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Volume: | Vol.31 | ||||
Number: | No.9 | ||||
Number of Pages: | 43 | ||||
Page Range: | pp. 855-897 | ||||
DOI: | 10.1002/fut.20498 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access |
Data sourced from Thomson Reuters' Web of Knowledge
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