Abstract
We analyze the performance of robust hedging strategies of digital double barrier options of Cox and Obłój (2011) against that of traditional hedging methods such as delta and delta/vega hedging. Digital double barrier options are financial derivative contracts which pay out a fixed amount on the condition that the underlying asset remains within or breaks into a range defined by two distinct barrier levels. We perform the analysis in hypothetical forward markets driven by models with stochastic volatility and jumps, calibrated to the AUD/USD foreign exchange rate market. Our findings are strikingly unanimous and suggest that, in the presence of model uncertainty and/or transaction costs, robust hedging strategies typically outperform in a substantial way model-specific hedging methods.
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