Monte Carlo construction of hedging strategies against multi-asset European claims
Grigori N. Milsteina Weierstrass Institute for Applied Analysis and Stochastics , Mohrenstrasse 39, Berlin , D-10117 , GermanyJohn Schoenmakersa Weierstrass Institute for Applied Analysis and Stochastics , Mohrenstrasse 39, Berlin , D-10117 , Germany
2002en
ABI
Abstract
For evaluating a hedging strategy we have to know at every moment the solution of the Cauchy problem for a corresponding parabolic equation (the value of the hedging portfolio) and its derivatives (the deltas). We suggest to find these quantities by Monte Carlo simulation of the corresponding system of stochastic differential equations using weak solution schemes. It turns out that with one and the same control function a variance reduction can be achieved simultaneously for the claim value as well as for the deltas. As illustrations we consider a Markovian multi-asset model with an instantaneously riskless saving bond and also some applications to the LIBOR rate model of Brace, Gatarck, Musiela and Jamshidian.
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