Download This PaperDelta Hedging with the Smile
Financial Markets and Portfolio Management, Vol. 18, No. 3, pp. 241-255, 2004
26 Pages Posted: 12 Sep 2005 Last revised: 29 Dec 2020
Abstract
This paper shows that the delta hedging performance of the Black-Scholes model can be substantially improved with a rather simple adjustment of the Black-Scholes delta. By utilizing the volatility smile, the Black-Scholes delta can be adjusted to account for the inverse movements between volatility and stock prices. Empirical tests in the FTSE 100 index option market show that the smile-adjusted delta consistently outperforms the Black-Scholes delta in terms of hedging performance.
JEL Classification: G0, G1
Suggested Citation: Suggested Citation
Vähämaa, Sami, Delta Hedging with the Smile. Financial Markets and Portfolio Management, Vol. 18, No. 3, pp. 241-255, 2004, Available at SSRN: https://ssrn.com/abstract=796630
Do you have negative results from your research you’d like to share?
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.