J. Gondzio, R. Kouwenberg and T. Vorst
Abstract
In this paper we consider the problem of hedging contingent claims
on a stock under transaction costs and stochastic volatility.
Extensive research has clearly demonstrated that the volatility
of most stocks is not constant over time.
As small changes of the volatility can have a major impact
on the value of contingent claims, hedging strategies should
try to eliminate this volatility risk. We propose a stochastic
optimization model for hedging contingent claims that takes
into account the effects of stochastic volatility, transaction
costs and trading restrictions. Simulation results show that
our approach could improve performance considerably compared
to traditional hedging strategies.
Key words: Option Hedging, Stochastic Volatility, Stochastic Programming, Computational Finance, High Performance Computing.