volume 11, issue 2, P199-293 2005
DOI: 10.1017/s1357321700003068
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A. D. Wilkie, M. P. Owen, H. R. Waters

Abstract: In this paper we present many investigations into the results of simulating the process of hedging a vanilla option at discrete times. We consider mainly a 'maxi' option (paying Max(A, B)), though calls, puts and 'minis' are also considered. We show the sensitivity of the variability of the hedging error to the actual investment strategy adopted, and to the many ways in which the simulated real world can diverge from the assumed option pricing model. We show how prudential reserves can be calculated, using co…

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