PERFORMANCES OF UTILITY BASED HEDGING AND EFFICIENT REHEDGING STRATEGIES TO OPTION REBALANCING

One of the most successful approaches to obtain hedging with transaction cost is the utility based approach pioneered by Hodges and Neuberger (1989). Judging against the best possible trade off between the risk and cost of hedging strategy, this approach seems to achieve excellent empirical performance. However, the approach has one major drawback that prevents the broad application  of it in practice, which is lack of rehedging  function calibrated when the hedge ratio moves outside the prescribed tolerance. We overcome this draw back by presenting a simple efficient rehedging model and some other well known strategies and find that our model outperforms all others..