Hedge Error Analysis In Black Scholes Option Pricing Model: An Asymptotic Approach Towards Finite Difference

5 May 2024  ·  Agni Rakshit, Gautam Bandyopadhyay, Tanujit Chakraborty ·

The Black-Scholes option pricing model remains a cornerstone in financial mathematics, yet its application is often challenged by the need for accurate hedging strategies, especially in dynamic market environments. This paper presents a rigorous analysis of hedge errors within the Black-Scholes framework, focusing on the efficacy of finite difference techniques in calculating option sensitivities. Employing an asymptotic approach, we investigate the behavior of hedge errors under various market conditions, emphasizing the implications for risk management and portfolio optimization. Through theoretical analysis and numerical simulations, we demonstrate the effectiveness of our proposed method in reducing hedge errors and enhancing the robustness of option pricing models. Our findings provide valuable insights into improving the accuracy of hedging strategies and advancing the understanding of option pricing in financial markets.

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