Dissertation Writing Help - Performance of robust model-free hedging via Skorokhod embeddings of digital double barrier options
I need a Custom Dissertation Writing Service on "Performance of robust model-free hedging via Skorokhod embeddings of digital double barrier options"
We analyse the performance of robust model-free hedging via Skorokhod embedding of digital double barrier options against that of traditional hedging methods such as delta and delta/Vega hedging. Digital double barrier options are financial derivative contracts which are most commonly traded in the foreign exchange markets and which pay out a fixed amount on the condition that the underlying asset remains within or breaks into a range defined by two distinct barrier levels. We performed the analysis in hypothetical markets, where we examined the influence of a set of market parameters and assumptions, and in two real-life situations, where we considered digital double barrier options written on the EUR/USD and the AUD/USD spot exchange rates. Our findings suggest that, although robust model-free pricing is in general not competitive with respect to traditional pricing methods, robust model-free hedging can substantially outperform traditional methods when applied to forward markets. In spot markets, we find that the strong performance of model-free hedging relative to traditional hedging methods becomes conditional on the level of risk-neutral drift, the maturity of the option, and the volatility of the underlying.