paper
Pricing formulas, model error and hedging derivative portfolios
T. R. Hurd
Pricing formulas, model error and hedging derivative portfolios
T. R. Hurd
Paper2001-08-31English
derivatives pricingarxiv
Description
We propose a method for extending a given asset pricing formula to account for two additional sources of risk: the risk associated with future changes in market--calibrated parameters and the remaining risk associated with idiosyncratic variations in the individual assets described by the formula. The paper makes simple and natural assumptions for how these risks behave. These extra risks should always be included when using the formula as a basis for portfolio management. We investigate an idea...
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