Abstract
We present a Malliavin calculus approach to a mixed fractional Brownian motion option hedging model, that adequately describes, e.g., the hedging of a lookback-barrier option with the floating strike price. The Markovian setup and smooth stochastic differentials are necessary components in the payoff function for classical Δ-hedging of a contingent claim. This is in contrast to the Malliavin calculus approach, which may be used to any type of path-dependent options. Based on the fractional Clark–Ocone formula, an entirely probabilistic computation is developed to obtain the closed-form solution of the hedging portfolio for a lookback-barrier option with the floating strike price. Numerical experiments are performed to demonstrate the performance of our proposed hedging model, and we also conduct sensitivity analysis to investigate the correlation between model parameters and the hedging portfolio.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
More From: Communications in Nonlinear Science and Numerical Simulation
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.