Abstracts

We consider option hedging in a model where the underlying follows an exponential Lévy process. We derive approximations to the variance-optimal and to some suboptimal strategies as well as to their mean squared hedging errors. The results are obtained by considering the Lévy model as a perturbation of the Black-Scholes model. The approximations depend on the first four moments of logarithmic stock returns in the Lévy model and option price sensitivities (greeks) in the limiting Black-Scholes model. We illustrate numerically that our formulas work well for a variety of Lévy models suggested in the literature.