Numerical experiments on hedging cliquet options

Fiodar Kilin, Morten Nalholm, and Uwe Wystup

Abstract

ABSTRACT

In this paper, we conduct pricing and hedging experiments in order to check whether simple stochastic volatility models are capable of capturing forward volatility and forward skew risks correctly. As a reference, we use the Bergomi model, which treats these risks accurately. The results of our experiments show that the cost of poor volatility modeling in the Heston model, the Barndorff-Nielsen-Shephard model and a variance-gamma model with stochastic arrival is too high when pricing and hedging cliquet options.