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Article: Pricing and Hedging of Discrete Dynamic Guaranteed Funds

TitlePricing and Hedging of Discrete Dynamic Guaranteed Funds
Authors
Issue Date2008
PublisherBlackwell Publishing, Inc.
Citation
Journal of Risk and Insurance, 2008, v. 75 n. 1, p. 167-192 How to Cite?
AbstractWe 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.
Persistent Identifierhttp://hdl.handle.net/10722/85862
ISSN
2015 Impact Factor: 1.535
2015 SCImago Journal Rankings: 1.489
ISI Accession Number ID

 

DC FieldValueLanguage
dc.contributor.authorTse, WMen_HK
dc.contributor.authorChang, ECen_HK
dc.contributor.authorLi, LKen_HK
dc.contributor.authorMok, HMKen_HK
dc.date.accessioned2010-09-06T09:10:06Z-
dc.date.available2010-09-06T09:10:06Z-
dc.date.issued2008en_HK
dc.identifier.citationJournal of Risk and Insurance, 2008, v. 75 n. 1, p. 167-192en_HK
dc.identifier.issn0022-4367en_HK
dc.identifier.urihttp://hdl.handle.net/10722/85862-
dc.description.abstractWe 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.-
dc.languageengen_HK
dc.publisherBlackwell Publishing, Inc.en_HK
dc.relation.ispartofJournal of Risk and Insuranceen_HK
dc.rightsThe definitive version is available at www.blackwell-synergy.com-
dc.titlePricing and Hedging of Discrete Dynamic Guaranteed Fundsen_HK
dc.typeArticleen_HK
dc.identifier.openurlhttp://library.hku.hk:4550/resserv?sid=HKU:IR&issn=0022-4367&volume=75 Issue 1&spage=167&epage=192&date=2008&atitle=On+the+Pricing+and+Hedging+of+Discrete+Dynamic+Guaranteed+Funden_HK
dc.identifier.emailTse, WM: rtse@business.hku.hken_HK
dc.identifier.emailChang, EC: ecchang@business.hku.hken_HK
dc.identifier.authorityChang, EC=rp01050en_HK
dc.description.naturelink_to_subscribed_fulltext-
dc.identifier.doi10.1111/j.1539-6975.2007.00253.x-
dc.identifier.hkuros166707en_HK
dc.identifier.volume75-
dc.identifier.issue1-
dc.identifier.spage167-
dc.identifier.epage192-
dc.identifier.isiWOS:000254243000009-
dc.publisher.placeUnited States-

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