Option Pricing, Interest Rates and Risk Management: Numerical Comparison of Local Risk-Minimisation and Mean-Variance Hedging

This paper provides comparative results on prices, hedging strategies and risks for local risk-minimisation and mean-variance hedging for a class of stochastic volatility models. A pricing and hedging framework is presented for both approaches with detailed analysis undertaken for the well-known Heston and Stein/Stein stochastic volatility models. These illustrate important quantitative differences between the two approaches.