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Hedging large risks reduces the transaction costs | | Farhat Selmi
; Jean-Philippe Bouchaud
; | | Date: |
9 May 2000 | | Subject: | cond-mat | | Affiliation: | CEA-Saclay and Science et Finance | | Abstract: | As soon as one accepts to abandon the zero-risk paradigm of Black-Scholes, very interesting issues concerning risk control arise because different definitions of the risk become unequivalent. Optimal hedges then depend on the quantity one wishes to minimize. We show that a definition of the risk more sensitive to the extreme events generically leads to a decrease both of the probability of extreme losses and of the sensitivity of the hedge on the price of the underlying (the `Gamma’). Therefore, the transaction costs and the impact of hedging on the price dynamics of the underlying are reduced. | | Source: | arXiv, cond-mat/0005148 | | Services: | Forum | Review | PDF | Favorites | |
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