Hedging errors induced by discrete rebalancing of the hedge portfolio of a delta-gamma hedging strategy are investigated. The rate of convergence of the expected squared hedging error as the number of adjustments of the hedge portfolio goes to infinity is analyzed. It is found that the delta-gamma strategy produces higher convergence rates than the usual delta strategy.
Subject classification (UKÄ)
- Probability Theory and Statistics
- rate of convergence
- discrete time hedging
- delta-gamma hedging