Optimal Weak Static Hedging of Equidty and Credit Risk Using Derivatives
Please always quote using this URN:urn:nbn:de:0296-matheon-6274
- We develop a generic method for constructing a weak static minimum variance hedge for a wide range of derivatives that may involve optimal exercise features or contingent cash flow streams, to provide a hedge along a sequence of future hedging dates. The optimal hedge is constructed using a portfolio of preselected hedge instruments which could be derivatives with different maturities. The hedge portfolio is weakly static in that it is initiated at time zero, does not involve intermediate re-balancing, but hedges may be gradually unwound over time. We study the static hedging of a convertible bond to demonstrate the method by an example that involves equity and credit risk. We investigate the robustness of the hedge performance with respect to parameter and model risk by numerical experiments.
Author: | Dirk Becherer, Ian Ward |
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URN: | urn:nbn:de:0296-matheon-6274 |
Referee: | Peter Imkeller |
Document Type: | Preprint, Research Center Matheon |
Language: | English |
Date of first Publication: | 2009/07/22 |
Release Date: | 2009/07/21 |
Institute: | Humboldt-Universität zu Berlin |
Preprint Number: | 634 |