Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/24038
Title: Pricing and hedging of discrete dynamic guaranteed funds
Authors: Tse, WM
Chang, EC
Li, LK
Mok, HMK
Issue Date: 2008
Publisher: Blackwell Publishing
Source: Journal of risk and insurance, 2008, v. 75, no. 1, p. 167-192 How to cite?
Journal: Journal of Risk and Insurance 
Abstract: We derive a risk-neutral pricing model for discrete dynamic guaranteed funds with geometric Gaussian underlying security price process. We propose a dynamic hedging strategy by adding a gamma factor to the conventional delta. Simulation results demonstrate that, when hedging discretely, the risk-neutral gamma-adjusted-delta strategy outperforms the dynamic delta hedging strategy by reducing the expected hedging error, lowering the hedging error variability, and improving the self-financing possibility. The discrete dynamic delta-only hedging not only causes potential overcharge to clients but also could be costly to the issuers. We show that a naive application of continuous-time hedging formula to a discrete-time hedging setting tends to worsen these possibilities.
URI: http://hdl.handle.net/10397/24038
DOI: 10.1111/j.1539-6975.2007.00253.x
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