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Stochastic moment problem and hedging of generalized Black-Scholes options
Authors:Jaya PN Bishwal
Institution:Department of Mathematics and Statistics, University of North Carolina at Charlotte, 376 Fretwell Bldg, 9201 University City Blvd., Charlotte, NC 28223-0001, United States
Abstract:In mathematical finance one is interested in the quadratic error which occurs while replacing a continuously adjusted portfolio by a discretely adjusted one. We first study higher order approximations of stochastic integrals. Then we apply the results to quantify quadratic error which occurs in estimating the discretely adjusted hedging risk in pricing European options in a generalized Black-Scholes market.
Keywords:Itô  stochastic differential equation  Fisk-Stratonovich integral  Approximation  Discrete time hedging
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