The trade-off between cost and risk of discretely rebalanced ELS hedges is analyzed under the proportional transaction costs. The analysis shows that the transaction costs have a considerable impact on the hedging performance.
The trade-off, or mean-variance graphs move in the right and lower directions in cases that the drift or the volatility of the underlying asset increases, the redemption level of the ELS decreases, or the maturity of the ELS gets longer.
The underlying asset move-based strategy (UAMB) reveals better performances than the time-based strategy (TS), while the delta move-based strategy (DMB) shows worse results. However, as the volatility of the underlying asset grows, the time-based strategy shows worse performances than the other two strategies does.
The difficulty of computational burden in simulating the hedge procedure is alleviated using the vectorized scheme, which makes the simulation analysis in feasible time.
