RT Journal Article
SR Electronic
T1 A Closed-Form Solution for the Global Quadratic Hedging of Options under Geometric Gaussian Random Walks
JF The Journal of Derivatives
FD Institutional Investor Journals
SP jod.2019.1.071
DO 10.3905/jod.2019.1.071
A1 Godin, Frédéric
YR 2019
UL http://jod.iijournals.com/content/early/2019/02/07/jod.2019.1.071.abstract
AB This study obtains a closed-form solution for the discrete-time global quadratic hedging problem of Schweizer (1995) applied to vanilla European options under the geometric Gaussian random walk model for the underlying asset. This extends the work of Rémillard and Rubenthaler (2013), who obtained closed-form formulas for some components of the hedging problem solution. Coefficients embedded in the closed-form expression can be computed either directly or through a recursive algorithm. The author also presents a brief sensitivity analysis to determine the impact of the underlying asset drift and the hedging portfolio rebalancing frequency on the optimal hedging capital and the initial hedge ratio.