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A Portfolio Approach to Risk Reduction in Discretely Rebalanced Option Hedges
Excerpt from A Portfolio Approach to Risk Reduction in Discretely Rebalanced Option Hedges
It is important to note that these high correlations are not a consequence of the systematic part of the hedging errors being correlated. This is because Gilster (1990) has shown that hedging errors are zero-beta as At 4 0 and at the same time, using Propositions I and 11, it can be shown that as At a 0, the correlation between hedging errors approaches one. This can be illustrated by the high correlations in table II for daily rebalancing and noting that in Gilster (1990) these hedging errors have betas close to zero.
It is important to note that these high correlations are not a consequence of the systematic part of the hedging errors being correlated. This is because Gilster (1990) has shown that hedging errors are zero-beta as At 4 0 and at the same time, using Propositions I and 11, it can be shown that as At a 0, the correlation between hedging errors approaches one. This can be illustrated by the high correlations in table II for daily rebalancing and noting that in Gilster (1990) these hedging errors have betas close to zero.
41 pages, Paperback
Published August 24, 2018
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