Understand and evaluate the costs associated with discrete-time rebalancing.
Free SOA Exam ALTAM (Advanced Long-Term Actuarial Mathematics) lesson in Embedded Options in Life Insurance and Annuity Products. 14 min read, ~2,040 words.
Discrete hedging is imperfect because delta drifts between rebalances; it is exact in continuous time but leaky in discrete time, with gamma as the leakage source. Boyle-Emanuel hedging error variance is approximately; per-period variance scales with and total error standard deviation scales with. Transaction costs scale with; halving the rebalance...
Read the full lesson, free →
Worked examples and practice. Free with a free account, no card.
What this lesson covers
- Content
- Example 1
- Example 2
- Common Mistakes
- Check Your Understanding
- Exam Shortcuts
Learning objectives
- 7d
Browse all free Exam ALTAM lessons or jump into free Exam ALTAM practice questions.