Discrete Hedging Error

Senior Quant · Risk & Model Critique

Question

Under what conditions does gamma-hedging break down in discrete time? Derive the hedging error for a delta-hedged BS portfolio rebalanced at intervals

\Delta t

. Show it is proportional to

(\Gamma\sigma^2 S^2/2)(\Delta W^2 - \Delta t)

. What is the distribution of the cumulative hedging error over

[0, T]

←P&L Attribution

5 / 9

Model Reserve→