In this paper we propose a maximum entropy estimator for the asymptotic distribution of the hedging error for options. Perfect replication of financial derivatives is not possible, due to market incompleteness and discrete-time hedging. We derive the asymptotic hedging error for options under a...

We study several approximations for the LIBOR market models presented in Brace, Gatarek, Musiela (1997), Jamshidian (1997) and Schoenmakers, Coffey (1999). Special attention is payed to log-normal approximations and their simulation by using direct simulation methods for log-normal random...