A Research And Analysis Of Dynamic Hedging Strategy Under Friction Market

Perfectly Hedging is a risk management activities with the aim of eliminatingthe risk absolutely. In theory, perfect hedging could be obtained by continuous-trading in a perfect market. Actually, it is unrealistic due to the friction factorssuch as transaction cost, tax, liquidity risk, discrete trading and so on. On thissense, it is necessary and valuable to explore an e?ective tool to analyze the hedgingerror in the friction market.In our paper, a new algorithm is applied to compute the moments of thehedging error of a European option by modelling the portfolio a?ne in variousfriction factors. And it is reachable to analyze the characteristic of hedging strategyand the quantity relation between the frequency of trading and the cost and errorof hedging quickly and e?ectively.Using a lattice based a?ne hedging analysis algorithm in section two, we an-alyze the performance of dynamic hedging strategy in friction markets. As anexample, this algorithm is applied to the hedging of a European call option with aBlack-Scholes delta hedge. Additionally, by comparing the results of Monte Carlosimulation, the advantage of our method is distinct evidently.