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Approximating Option Prices Under Large Changes Of Underlying Asset Prices by JAE-YUN JUN; YVES RAKOTONDRATSIMBA is a Economics, Econometrics and Finance article available to read on EtoBox.
What is Approximating Option Prices Under Large Changes Of Underlying Asset Prices about?
When one invests in portfolios of derivatives (such as options), the delta-gamma approximation (DGA) is often used as a risk management strategy to reduce the risk associated with the underlying asset price. However, this approximation is locally accepted only for small changes of the underlying asset price. When these changes become large, the option prices estimated by the DGA may significantly differ from those of the market (or those that are estimated using, for instance, the Black–Scholes model), depending mainly on the time-to-maturity, implied volatility, and moneyness. Hence, in practice, before the change of the underlying asset price becomes large, rebalancing operations are demanded to minimize the losses occurred due to the error introduced by the DGA. The frequency of rebalancing may be high when the rate at which the underlying asset price significantly changes. Nonetheless, frequent rebalancing may be unattainable, as there are associated transaction costs. Hence, there is a trade-off between the losses resulting from the inaccurate performance of the DGA and the transaction costs incurring from frequent hedging operations. In the present work, we show two approache
Who reads Approximating Option Prices Under Large Changes Of Underlying Asset Prices?
It is typically read by researchers, students, and practitioners in Economics, Econometrics and Finance.
- Author
- JAE-YUN JUN; YVES RAKOTONDRATSIMBA
- Publisher
- World Scientific Pub Co Pte Ltd
- Published
- 2023
- Language
- EN
- Field
- Economics, Econometrics and Finance (Social Sciences)