Hedging Periodic Cashflow

C. Yang

Financial products such as Leveraged ETFs involve the hedging of an infinite-horizon cashflow stream, where the hedging occurs in continuous time while the hedging performance is monitored periodically at discrete time points. Traditional theoretical frictionless hedging strategy can cause a considerable amount of market frictional costs and lead to large hedging error. We study how the incorporation of market frictions affects the characteristics of the optimal hedging strategy, and how to strike a balance between minimising the frictions and minimising the hedging error.