Cutting edge: Minimising risk when hedging crude oil options
In this paper, Christian-Oliver Ewald, Roy Nawar and Tak Kuen Siu study the performance of locally risk-minimising hedging strategies in the context of futures and options written on crude oil. In contradiction to prior research, the authors show it is important to include jumps in the hedging framework
The hedging of derivative securities is a central problem in finance and has been studied extensively by both academics and market practitioners. In a complete market, all contingent claims can be perfectly hedged and the main question is how the perfect hedge can be computed. However, in an incomplete market, many derivative securities cannot be perfectly hedged – that is, exactly replicated by self-financing strategies. The hedging problem becomes more challenging. Different hedging approaches
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