Static Hedging

Sammanfattning: Hedging is the process of minimizing the risk associated with an investment. The most common method used for hedging an option is delta hedging, however, this thesis will show that delta hedging is a both a time consuming and costly method due to the requirement of continuous re-balancing. The short-comings of delta hedging paves the way for alternative hedging strategies to be taken into consideration. This thesis will evaluate the performance of static hedging strategies first introduced by Carr, Ellis and Gupta in 1998. Static Hedging is a method that reduces the portfolio re-balancing instances of a hedging position to a finite number or zero, thus minimizing transactions costs and liquidity related obstacles. The aim with this thesis is to explain the differences between Static and Dynamic Hedging and point out how the methods differ in practical use by detailed descriptions of the theory and mathematical fundamentals.