<abstract xmlns="http://www.w3.org/1999/xhtml"><p> Transaction costs of derivative hedging appear in financial markets. This paper considers the problem of delta hedging and the reduction of expected proportional transaction costs. In the literature the expected approximate proportional transaction costs are customarily estimated by the gamma term, usually the largest term of the associated series expansion. However, when options are to expire in a month or few weeks, other terms may become even larger so that more precise estimates are needed. In this paper, different higher-order estimates of proportional transaction costs are analyzed. The problem of the reduction of expected transaction costs is considered. As a result, a suitably adjusted delta is given, for which the expected approximate proportional transaction costs can be reduced. The order of the mean and the variance of the hedging error can be preserved. Several examples are provided.</p></abstract>

Transaction costs of derivative hedging appear in financial markets. This paper considers the problem of delta hedging and the reduction of expected proportional transaction costs. In the literature the expected approximate proportional transaction costs are customarily estimated by the gamma term, usually the largest term of the associated series expansion. However, when options are to expire in a month or few weeks, other terms may become even larger so that more precise estimates are needed. In this paper, different higher-order estimates of proportional transaction costs are analyzed. The problem of the reduction of expected transaction costs is considered. As a result, a suitably adjusted delta is given, for which the expected approximate proportional transaction costs can be reduced. The order of the mean and the variance of the hedging error can be preserved. Several examples are provided.

Reduction of the Mean Hedging Transaction Costs / Redukcija povprečnih transakcijskih stroškov hedging tehnike

University of Maribor, Faculty of Economics and Business, Slovenia

Naše gospodarstvo/Our economy

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Transaction costs of derivative hedging appear in financial markets. This paper considers the problem of delta hedging and the reduction of expected...

Reduction of the Mean Hedging Transaction Costs / Redukcija povprečnih transakcijskih stroškov hedging tehnike

Publié en ligne: 29 oct. 2015

Pages: 23 - 31

Reçu: 01 juin 2015

Accepté: 01 sept. 2015

DOI: https://doi.org/10.1515/ngoe-2015-0019

Mots clés
derivatives, delta hedging, transaction costs, hedging error

© 2015

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Reduction of the Mean Hedging Transaction Costs / Redukcija povprečnih transakcijskih stroškov hedging tehnike

Publié en ligne: 29 oct. 2015

Pages: 23 - 31

Reçu: 01 juin 2015

Accepté: 01 sept. 2015

DOI: https://doi.org/10.1515/ngoe-2015-0019

Mots clésderivatives, delta hedging, transaction costs, hedging error

© 2015

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Mots clés
derivatives, delta hedging, transaction costs, hedging error