Hedging The Risk In The Continuous Time Option Pricing Model With Stochastic Stock Volatility
D. F. Wang
Abstract
In this work, I address the issue of forming riskless hedge in the continuous time option pricing model with stochastic stock volatility. I show that it is essential to verify whether the replicating portfolio is self-financing, in order for the theory to be self-consistent. The replicating methods in existing finance literature are shown to violate the self-financing constraint when the underlying asset has stochastic volatility. Correct self-financing hedge is formed in this article.
Create a lesson
Related papers
Real-Space renormalization for the drawups and drawdowns of stochastic trajectories: universality classes for diffusion processes and random walks via the scale function
Cecile Monthus
Stochastic synthesis and degradation of arbitrary diffusive processes
Denis Boyer, Gabriel Mercado-Vásquez
Critical amplitudes of the Baxter-Wu model from MCPA and Wolff simulations: free-exponent and fixed-exponent fits
Vyacheslav Mozolenko, Ian Pile, Lev Shchur
Capillary Coarsening Drives Re-entrant Statistical Transitions in Early Coffee-Ring Growth
Arundas Chandradasan, Dileep Mampallil
Maximum entropy explanation for the ubiquity of power-law mechanical responses
Sverre Holm
Thermodynamic Bethe Ansatz for the Toda chain from inverse scattering transform
Alberto Brollo