- Joined
- 6/11/10
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I mean, there is an example in John Hull's book on dynamic hedging.
The historical volatility is plugged in, and a replicating portfolio is constructed right from Black-Scholes. There is cumulative error during a period. However, is it practical to hedge an option on some stock in this way? Or he just showed us the fittest data for this model?
This problem is very important for exotic option products. Suppose your client needs a special structured product and you come up with a solution out of Black-Scholes framework, can you roughly make up the product and control the hedging error to a bearable level?
The historical volatility is plugged in, and a replicating portfolio is constructed right from Black-Scholes. There is cumulative error during a period. However, is it practical to hedge an option on some stock in this way? Or he just showed us the fittest data for this model?
This problem is very important for exotic option products. Suppose your client needs a special structured product and you come up with a solution out of Black-Scholes framework, can you roughly make up the product and control the hedging error to a bearable level?