Discrete-Time Quadratic Hedging of Barrier Options in Exponential L\'evy Model
Abstract
We examine optimal quadratic hedging of barrier options in a discretely sampled exponential L\'evy model that has been realistically calibrated to reflect the leptokurtic nature of equity returns. Our main finding is that the impact of hedging errors on prices is several times higher than the impact of other pricing biases studied in the literature.
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