Static versus Dynamic Hedges: An Empirical Comparison for Barrier Options
Review of Derivatives Research
We conduct an empirical comparison of static versus dynamic hedges of barrier options. Using more than five years of data, we compare a number of static hedges from the literature with dynamic hedges based on the local volatility model. The main result is that the variability of profit-and-loss distributions from certain static hedges is significantly smaller than that of dynamic hedges and robust to changing market scenarios. Furthermore, these static hedges are able to provide a robust tracking of barrier options' sensitivities.
Local volatility model
Empirical hedging Analysis
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