Abstract
We illustrate how to compute local risk minimization (LRM) of call options for exponential Lévy models. Here, LRM is a popular hedging method through a quadratic criterion for contingent claims in incomplete markets. Arai & Suzuki (2015) have previously obtained a representation of LRM for call options; here we transform it into a form that allows use of the fast Fourier transform (FFT) method suggested by by Carr & Madan (1999). Considering Merton jump-diffusion models and variance gamma models as typical examples of exponential Lévy models, we provide the forms for the FFT explicitly; and compute the values of LRM numerically for given parameter sets. Furthermore, we illustrate numerical results for a variance gamma model with estimated parameters from the Nikkei 225 index.
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