This paper derives a closed-form formula for the hedging error of optimal and continuously rebalanced hedging strategies in a model with leptokurtic IID returns and, in contrast to the standard Black-Scholes result, shows that continuous hedging is far from riskless even in the absence of...

The paper studies an optimal switching policy between fixed and floating exchange rate regimes when the central bank dislikes losing reserves. We show that the optimal central bank intervention rule is not fully transparent in that the central bank will choose to randomize the devaluation over a...