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Abstract
Hedging at-the-money digital options near maturity, remains a challenge in quantitative finance. In the present work, we carry out a hedging strategy by means of a bull spread. We study the probability of super- and sub-hedge the digital option and minimize the probability of a sub-hedge considering the cost of hedging and illiquidity issues. We perform a wide variety of numerical experiments under different models for the underlying asset dynamics. A calibration to market data is provided and used to get the optimal composition of the bull spread satisfying the cost of hedging restriction.
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Details
1 Universitat Politècnica de Catalunya, Department of Statistics and Operations Research, Barcelona, Spain (GRID:grid.6835.8) (ISNI:0000 0004 1937 028X)
2 University of Barcelona, Department of Econometrics, Statistics and Applied Economics, Barcelona, Spain (GRID:grid.5841.8) (ISNI:0000 0004 1937 0247)
3 Independent Financial Advisor, Rosario, Argentina (GRID:grid.5841.8)