Hedging error measurement for imperfect strategies

Jack Baczynski, Jonathan da Silva and Rosalino Junior present an index for measuring hedging errors


A hedging strategy is intended to eliminate the exposure of the practitioner that holds a short or long position in a financial derivative security via a portfolio that replicates pointwise the value of the derivative at the maturity time T (see, for example, Hull 2003). In practice, trading times and observation times of market prices are discrete and trading occurs in incomplete markets. Any of these motives suffice to render the hedging strategies imperfect, so that a hedging error eT arises.

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