IIARD International Institute of Academic Research and Development

INTERNATIONAL JOURNAL OF APPLIED SCIENCES AND MATHEMATICAL THEORY (IJASMT )

E- ISSN 2489-009X
P- ISSN 2695-1908
VOL. 10 NO. 1 2024
DOI: https://doi.org/10.56201/ijasmt.v10.no1.2024.pg8.18

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Dynamics of Utility Based Hedging Strategy

Obiageri E. Ogwo, Aharanwa Boniface C. and Oliwe Emmanuel and Edugbe Isaac E.

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Abstract

We reviewed the utility based option trading and hedging approach as well as other results under the asymptotic analytical approximation method and introduced the option hedging problem which clearly illustrates the intuition behind the hedging bandwidth and volatility adjustment. However, we used the multi-period measure determine the absolute risk aversion to formulate a dynamic spectrum of variation for the market risk. Hence, determine the best hedging strategy under the frame work of utility based hedging method, the hedgers value function, market volatility, the rate of purchase (call) and sales (put) on risky assets with sufficient precision.

keywords:

Utility Based, Hedging Strategy, Multi-period Measure, Absolute Risk Averse and Market Volatility

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References:

Andersen, E. D. and Damgaard, A. (1999). Utility Based Option Pricing Proportional Transaction
Costs and Diversification Problems:an Interior-Point Optimization Approach, Applied
Numerical Mathematics, 29 ?395–422.


Avellandeda, M. Paras, A. (1994).Optimal Hedging Portfolios for Derivative Securities in the
Presence of Large Transaction Costs, Applied Mathematical Finance, 1 ?165-193

Barles, G. and Soner, H. M. (1998). Option Pricing with Transaction Costs and a Nonlinear Black-
Scholes Equation, Finance and Stochastics, 2 ?369–397.

Clewlow, L. and Hodges, S. (1997). Optimal Delta-Hedging under Transaction Costs, Journal of
Economic Dynamics and Control, 21 ?1353–1376.

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