On the Performance of Asymptotic Locally Risk Minimizing Hedges in the Heston Stochastic Volatility Model

This paper investigates the use of the asymptotic Heston solution in locally risk minimizing hedging. The asymptotic Heston solution is presented along with issues that are relevant to its use. Comparison between the exact and asymptotic Heston hedges are made using both simulated and real historical data. The asymptotic Heston hedge is found to be a viable alternative to the exact hedge. It provides a means for faster calculation, while performing as well as the exact Heston hedge in the locally risk minimizing framework