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Impact of Black-Scholes assumptions on Delta Hedging
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Resumo(s)
In this work we are going to evaluate the different assumptions used in the Black-
Scholes-Merton pricing model, namely log-normality of returns, continuous interest rates,
inexistence of dividends and transaction costs, and the consequences of using them to
hedge different options in real markets, where they often fail to verify. We are going to
conduct a series of tests in simulated underlying price series, where alternatively each
assumption will be violated and every option delta hedging profit and loss analysed. Ultimately
we will monitor how the aggressiveness of an option payoff causes its hedging to
be more vulnerable to profit and loss variations, caused by the referred assumptions.
Descrição
Palavras-chave
Black-Scholes-Merton model Assumptions Delta Hedging Hedging quality Profit and loss Option payoffs Market discontinuities Volatility Interest rate Dividends Transaction costs