Incorporating Overhedges in SciFinance PDE and Monte Carlo Models

SciFinance allows users to incorporate over(under) hedges of arbitrary characteristics into synthesized PDE, Monte Carlo, and GPU-enabled Monte Carlo code. Users can call existing library functions in SciFinance-synthesized code for most any purpose, overhedges being just one example.

Barriers, which create discontinuities payoffs, coupons and other cashflows, are common features of financial products. As spot prices approach barriers, hedging parameters such as deltas, gammas and vegas can become extremely volatile. In theory, hedge rebalances need to be frequent and large with concomitantly large transaction costs. Consequently, such products are frequently booked and hedged as option spreads, which smooth discontinuities, limiting deltas and gammas, and thereby reducing hedging costs.