Static Hedging Intro Intensifying Globalization Thesis

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This paper will examine the differences between static hedges, delta hedges and gamma-delta hedges. The effectiveness of each of these hedge types will be tested during times of both low volatility and high volatility in the markets.

Previous literature has found that static hedging can outperform delta hedging in the real world, a function of the random walk price fluctuations in the underlying asset and tighter bid-ask spreads on underlying assets vs. options (Carr & Wu, 2002; Englemann et al., 2007). More complicated hedging strategies have an appeal to risk managers who want to show that they have done everything in their power to hedge their company's positions, but ultimately, static hedging may be just as effective.

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In examining these three different hedging strategies, how they work and what their effects are, we hope to develop a greater understanding of this issue.

Engelmann, Bernd; Fengler, Mattias R.; Nalholm, Morten; Schwender, Peter. (2007). Static verus Dynamic Hedges: an Empirical Comparison for Barrier Options. Review of Derivatives Research. Vol. 9, No 3 pp.239-264.

Carr, Peter & Wu, Liuren. (2002) Static Hedging of Standard Options. Fordham University. Retrieved February 24, 2009 at http://www.bnet.fordham.edu/crif/WorkingPapers/crifwp02010.pdf.....

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