Comparison of local risk minimization and delta hedging strategy for exponential Lévy models

Abstract

We discuss the differences of local risk minimization (LRM) and delta hedging strategies, in exponential Lévy models, where delta hedging strategies in this paper are defined under the minimal martingale measures (MMM). First of all we give inequality estimations for the differences of LRM and delta hedging strategies, and then show numerical examples for the two typical exponential Lévy models, Merton models and variance Gamma (VG) models.

On the difference between locally risk-minimizing and delta hedging strategies for exponential Lévy models

“…Conclusions are given in Section 5. Remark that [5] treated the same problem as ours, although all results obtained in [5] are model-dependent. On the other hand, we obtain in this paper model-independent estimations.…”