Journal of Computational and Applied Mathematics 416 (2022) 114496

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Journal of Computational and Applied

Mathematics
journal homepage: www.elsevier.com/locate/cam

Option pricing under mixed hedging strategy in time-changed

mixed fractional Brownian model
∗
Kyong-Hui Kim , Su-Hyang Kim, Ho-Bom Jo
Faculty of Mathematics, Kim Il Sung University, Pyongyang, Democratic People’s Republic of Korea

article info a b s t r a c t

Article history: In this paper, we obtain a mixed hedging strategy and a pricing formula in a discrete time
Received 13 October 2021 setting for a European call option in the time-changed mixed fractional Brownian model.
Received in revised form 31 May 2022 In this manner, we generalize the mixed hedging and the pricing formula in Brownian
motion to the time-changed mixed fractional Brownian motion. Finally, through some
Keywords:
Time-changed process numerical experiments and empirical analysis, we show that our mixed hedging is better
Mixed fractional Brownian motion than delta hedging on the hedging error ratio in some cases.
Mixed hedging strategy © 2022 Elsevier B.V. All rights reserved.
Option pricing

1. Introduction

Over the last years, studies have shown that many financial market time series display scaling laws and long-range
dependence. Although the works of Black and Scholes [1] and Merton [2] have contributed distinctly in option pricing,
their approaches are based on the assumption of continuous-time trading, so the price of any option does not depend
on the time scaling and investors’ risk preferences (scaling-free pricing and preference-free pricing). However, in actual
markets, continuous trading is physically impossible to realize and the investors amend the option risk from time to time.
Therefore, it has been emphasized that the scaling and the risk preference play an important role in portfolio hedging
and option pricing in a discrete time case [3,4], thus one should consider the scaling laws and risk preference. In recent
years with respect to these topics, a lot of research has been progressed [5–12].
Wang [13] proposed a mixed hedging strategy under the classical B–S model in a discrete time case and obtained
a pricing formula for European call option through the mixed hedging strategy, and showed that the mixed hedging is
better than the delta hedging in some cases. In addition, he generalized his results to mixed hedging and option pricing
with the proportional transaction costs in the same model [14].
However, some empirical studies have shown that the B–S model cannot capture many of the abnormal behaviors of
prices, such as heavy tailed, long-range dependence and periods of constant values, etc. Therefore, one should replace the
classical B–S model by other models.
Since a fractional Brownian motion with H > 1/2 (Hereafter FBM) has two important properties such as self-
similarity and long-range dependence, but unfortunately, it is neither a Markov process nor a semi-martingale, so one
cannot apply the Ito stochastic analysis to the FBM model [15–17]. Actually, it admits arbitrages in a complete and
frictionless market [18,19]. To overcome this difficulty, Cheridito [20] introduced a mixed fractional Brownian motion
(MFBM hereafter). The MFBM is a family of Gaussian processes that is a linear combination of a BM and a FBM, it is
equivalent to one with a BM, and hence it does not only imply arbitrage-free but exhibit long-memory property [21]. In
this environment, pricing formulae for a European call option were derived [22,23].

∗ Corresponding author.
E-mail address: kh.kim@ryongnamsan.edu.kp (K.-H. Kim).

https://doi.org/10.1016/j.cam.2022.114496
0377-0427/© 2022 Elsevier B.V. All rights reserved.
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

As another generalization of B–S model, Magdziarz [24] applied the sub-diffusive mechanism to describe properly
financial data exhibiting periods of constant values and introduced the sub-diffusive geometric Brownian motion as a
model of underlying asset processes, which has been referred to time-changed Brownian motion model. He pointed out
that this model is arbitrage-free but incomplete and also he derived the corresponding sub-diffusive B–S formula for a
European option in this model [25]. As above mentioned, as well as extension of B–S model to the MFBM model, time-
changed Brownian model has been also extended to time-changed mixed fractional Brownian models of two forms. They
are as follows, the first is the case that underlying asset processes are represented by time-changed stochastic differential
equation [26] and the second case has exponential representation of time-changed mixed fractional Brownian motion [27].
In these models, pricing formulae for the European call option have been derived respectively.
The aim of this paper is to extend a mixed hedging strategy and a pricing formula for the European call option in the
B–S model [13] to the time-changed mixed fractional Brownian model [27].
The rest of the paper is as follows. In Section 2, we introduce the time-changed mixed fractional Brownian model. In
Section 3, a mixed hedging strategy and a pricing formula for European call option was derived. In Section 4, we consider
some numerical experiments and discussion; on different trading frequencies compare performances of mixed hedging
and delta hedging in our model and investigate the influence of parameters. In Section 5, we apply delta hedging and
mixed hedging for empirical data by our model and investigate the performance.

2. Time-changed mixed fractional Brownian model

Let us consider a financial market model, which consists of a stock and a bond with price dynamics given by
St = S0 eµTα (t)+σ Mα,H (t) , (2.1)
and
Qt = Q0 ert , t ∈ (0, T ], (2.2)
where S0 > 0 and µ, σ , r are risk preference parameter, volatility parameter and risk-free interest rates respectively.
The time transformation process Tα (t) is the inverse α -stable subordinator defined as below
Tα (t) = inf{τ > 0 : Uα (τ ) > t },
α
where Uα (t) is a strictly increasing α -stable Lévy process with Laplace transform: E(−uUα (τ ) ) = e−τ u , α ∈ (0, 1). The
parent process MtH = aBt + bBH t is a mixed fractional Brownian motion and Mα,H (t) = aB(Tα (t)) + bBH (Tα (t)) is a time-
changed mixed fractional Brownian motion and the process Tα (t) is assumed to be independent of MtH . Moreover, we
assume that the market is arbitrage-free and frictionless. From (5.33) of [28], it follows that for ν > 0,
Γ (ν + 1) αν
E [(Tα (t))ν ] = t .
Γ (να + 1)
E(|X (x)|n )
For β > 0, a random function X (x) is said to be o(xβ ) if limx→0 xnβ
= 0 for every n ∈ N. The following properties are
obvious: for 0 < β, β1 , β2 < +∞ and n ∈ N
o(xβ1 ) · o(xβ2 ) = o(xβ1 +β2 ), in particular (o(xβ ))n = o(xnβ ),
o(xβ1 ) + o(xβ2 ) = o(xmin{β1 ,β2 } ).

3. The mixed hedging strategy and option pricing under the time-changed mixed fractional Brownian model

In the section a mixed hedging strategy is given, and based on the strategy, we obtain a discrete-time pricing formula
for the European call option under the time-changed mixed fractional Brownian model.
Let Vt = V (t , St ) be the price at time t of a European call option with expiration date T and exercise price K . In
addition, we assume that partial derivatives of V (t , St ) are continuous on their respective domains.

Theorem 3.1. The mixed hedging strategy under the time-changed mixed fractional Brownian model (2.1) is given by
t α−1
( )
∂ Vt 1 µ 3γ1 + 2µγ2 − Γ (α )
∆t · γ3
∂ 2 Vt
Xt = + · α−
· S,
2 t
(3.1)
∂ St 2 γ3 + µ2 γ2 + 3µγ1 − µ t 1
∆t · γ 3 ∂ S t
Γ (α )

where
α (t α−1 )2 α 2H (t α−1 )2H +1 Γ (2H + 1) 2H
γ1 = a2 ∆t + b2 ∆t ,
Γ (2α ) Γ ((2H + 1)α )
α (t α−1 )3 α 2H +1 (t α−1 )2H +2 Γ (2H + 2) 2H +1
γ2 = a2 (∆t)2 + b2 ∆t ,
Γ (2α ) Γ ((2H + 2)α )
( α−1 )2H
t α−1 t
γ3 = a2 + b2 (∆t)2H −1 .
Γ (α ) Γ (α )
2
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Corollary 3.1. The mixed hedging strategy under the mixed fractional Brownian model St = S0 eµt +σ MH
t is given by
∂ Vt µ∆t ∂ Vt 2
Xt = + St . (3.2)
∂ St 1 + µ∆t ∂ St 2

Corollary 3.2. The mixed hedging strategy under the Brownian model of a = 1, b = 0 is obtained by substituting them in
(3.2), that is, St = S0 eµt +σ Bt .

Remark 3.1. This is just the mixed hedging strategy of [13]. Therefore, our result generalizes the mixed hedging in B–S
model of [13] to time-changed mixed fractional Brownian model.

Based on the mixed hedging strategy, a discrete-time pricing formula for the European call option under the
time-changed mixed fractional Brownian model is obtained as follows.

Theorem 3.2. Let Vt = V (t , St ) be the price of the European call option on the stock St satisfying Eq. (2.1), then Vt satisfies
the following partial differential equation
∂ Vt ∂ Vt 1 ∂ 2 Vt
+ rSt + σ̂ 2 St 2 − rVt = 0,
∂t ∂ St 2 ∂ St 2
with the boundary condition V (T , ST ) = max{ST − K , 0} and the price of the European call option is given by (5.4.11)–(5.4.12)
of [29] as follows

V (t , St ) = St N(d1 ) − Ke−r(T −t) N(d2 ), (3.3)

ln(St /K )+r(T −t)+σ 2 /2
∫T
where d1 = σ
, d 2 = d1 − σ , σ 2 : =
t
σ̂ 2 (s)ds and
( ( α−1 )2H )
t α−1 α−1
( )
1 2 t t
σ̂ (t) = r µC − µ C
2 2
+ σ 1 − µC · a
2
+b 2
(∆t)2H −1
, (3.4)
Γ (α ) 2 Γ (α ) Γ (α )

t α−1
3γ1 + 2µγ2 − Γ (α )
∆t · γ3
C = , (3.5)
t α−1
γ3 + µ2 γ2 + 3µγ1 − µ Γ (α) ∆t · γ3

α (t α−1 )2 α 2H (t α−1 )2H +1 Γ (2H + 1) 2H

γ1 = a2 ∆t + b2 ∆t ,
Γ (2α ) Γ ((2H + 1)α )
α (t α−1 )3 α 2H +1 (t α−1 )2H +2 Γ (2H + 2) 2H +1
γ2 = a2 (∆t)2 + b2 ∆t ,
Γ (2α ) Γ ((2H + 2)α )
and N(·) is the standard normal distribution function.

Corollary 3.3. The price Vt = V (t , St ) of the European call option under the mixed fractional Brownian model St = S0 eµt +σ Mt
is obtained by replacing σ̂ 2 of (3.4) by
( )
σ 2 (a2 +b2 (∆t)2H −1 )
2 r −µ− 2
µ∆t
σ̂12 = σ 2 (a2 + b2 (∆t)2H −1 ) + . (3.6)
1 + µ∆t

Corollary 3.4. The price Vt = V (t , St ) of the European call option under the Brownian model St = S0 eµt +σ Bt is obtained by
replacing σ̂ 2 of (3.4) by
( )
σ2
2 r −µ− 2
µ∆t
σ̂22 = σ 2 + ,
1 + µ∆t
which is the special case of a = 1, b = 0 in (3.6).

Remark 3.2. The result of Corollary 3.4 as well as Corollary 3.2 is also consistent with [13].

Remark 3.3. In [27], they showed that under the time-changed mixed fractional Brownian model, the
)2H price of the
2 2 t α−1 2 t α−1
(
European call option Vt = V (t , St ) satisfies the Black–Scholes equation with σ̂ = σ (a Γ (α ) + b Γ (α )
2
(∆t)2H −1 ) in
α−1 α−1
the discrete time case, while with σ̂ 2 = a2 σ 2 tΓ (α ) in the continuous time case, since if we set ∆t = 0, then σ̂ 2 = a2 σ 2 tΓ (α ) .
3
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Fig. 1. Sample paths of stock prices driven by time-changed mixed fractional Brownian motion.

As a result, since if we set ∆t = 0, then C = 0 in (3.5) in the continuous time case, our price of (3.3)–(3.4) is consistent
with that of [27].
We emphasize that the pricing formulae of the European call option in accordance with two different hedging strategies
(the delta hedging and the mixed hedging strategy) are just the results of [27] and this paper.

4. Numerical experiment

4.1. Comparison of delta hedging and mixed hedging in time-changed mixed fractional Brownian model

It turned out that the scaling law and the risk preference parameter µ play an important role in option pricing. In
this section, with respect to the hedging error ratio, we examine the effects of the delta hedging and our mixed hedging
strategy in the time-changed mixed fractional Brownian model. We note that the delta hedging strategy is ∆t = ∂∂VS t .
t

4.1.1. Simulation of the stock prices driven by the time-changed mixed fractional Brownian motion
(n) ∑N
At first, we simulate a time-changed Brownian motion B(Tα (t)) by a continuous time random walk Ut = n−α/2 i=n1t Zi
from Theorem 6.13 of [30], where we set α = 0.9, n = 10 and {Zi , 1 ≤ i ≤ 10 } is a sequence of i. i. d. random variables
4 4

with EZi = 0, VarZi = 1 which represents the jumps of a particle. Moreover, {Ti , 1 ≤ i ≤ 104 } is a sequence of i. i. d.
strictly α− stable random variables which expresses random arrival times between consecutive jumps and
n
∑
Nt = max{n ∈ N : Ti ≤ t }.
i=1

(n) ∑N
Next, we simulate a time-changed fractional Brownian motion BH (Tα (t)) by the scaling ∑ process Vt : = cn−α H nt
i=1 Yi
∞
from (2.5) in Theorem 2.4 of [31], where we set H = 0.8 and jumps {Yi } are Yi : = c Z
j=0 j i−j with cj = j−γ
as in
Example 4.6.1 of [28]. These {Yi } mean correlated jumps with light tail and strong positive dependence. As we set H = 0.8,
thus γ = 0.7, c = 10.65019 from (6.11) and (6.12) of Chapter 4 of [28].
(n)
Next, we simulate an inverse stable subordinator Tα (t) by Wt : = n−α Nnt from (6.35) of [30].
(n) (n) (n)
Finally, by substituting continuous time random walks Ut , Vt , Wt in B(Tα (t)), BH (Tα (t)), Tα (t) of the model (2.1),
we can simulate sample paths of the stock prices driven by the model (2.1), i.e. time-changed mixed fractional Brownian
motion. Sample paths with S0 = 49, a = b = 1, µ = 0.11, σ = 0.2 are shown in Fig. 1.

4.1.2. A numerical comparison of delta hedging and mixed hedging strategies with the different trading frequencies (fractal
scaling)
– In the case of the daily hedging strategy
4
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 4.1.1
Simulation of delta hedging per day with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility σ =
0.2 per annum, and T = 20/252 years.
Day Stock price Delta hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 49 0.416676 41667.58 2041711.577 2041711.577 405.1015 0.95036663
1 49.19637 0.435974 1929.799 94939.10318 2137055.782 424.019 0.98572535
2 49.2242 0.435376 −59.7344 −2940.37659 2134539.424 423.5197 0.95394381
3 49.10006 0.414727 −2064.9 −101386.614 2033576.33 403.4874 0.8584117
4 49.81203 0.507559 9283.119 462410.966 2496390.783 495.3156 1.14260635
5 49.81203 0.5056 −195.905 −9758.44294 2487127.656 493.4777 1.09752738
6 49.81203 0.503513 −208.633 −10392.4281 2477228.705 491.5136 1.05181776
7 49.81203 0.501278 −223.558 −11135.8963 2466584.323 489.4017 1.00523684
8 49.81203 0.498865 −241.233 −12016.3077 2455057.417 487.1146 0.95755407
9 49.81203 0.496241 −262.439 −13072.6305 2442471.901 484.6174 0.9085274
10 49.81203 0.493358 −288.302 −14360.8833 2428595.635 481.8642 0.85788509
11 49.81203 0.490153 −320.481 −15963.7958 2413113.703 478.7924 0.8053058
12 49.81203 0.486538 −361.521 −18008.1037 2395584.392 475.3144 0.75039225
13 49.81203 0.482383 −415.506 −20697.2096 2375362.497 471.3021 0.69263225
14 49.81203 0.477489 −489.389 −24377.4373 2351456.361 466.5588 0.63133527
15 49.64446 0.429571 −4791.79 −237885.798 2114037.122 419.4518 0.49003135
16 50.46511 0.643725 21415.36 1080728.273 3195184.847 633.9652 0.85613851
17 50.46511 0.660499 1677.481 84654.24125 3280473.053 650.8875 0.77817379
18 50.87863 0.816056 15555.67 791451.379 4072575.32 808.0507 1.00159304
19 49.7406 0.364288 −45176.8 −2247122.98 1826260.393 362.3533 0.17378164
20 51.6391 1 63571.21 3282760.111 5109382.858 1013.766 1.6390968

Hedging cost = 109382.8577, discounted hedging cost = 108949.70188, and hedging error ratio = 0.146396541.

Table 4.1.2
Simulation of our mixed hedging per day with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility
σ = 0.2 per annum, and T = 20/252 years.
Day Stock price Mixed hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 49 0.416508 41650.82 2040890.184 2040890.184 404.9385 0.94839415
1 49.1964 0.440896 2438.782 119979.2102 2161274.333 428.8243 0.98386322
2 49.2242 0.440116 −77.955 −3837.2722 2157865.885 428.148 0.95217162
3 49.1001 0.419356 −2076.05 −101934.214 2056359.819 408.0079 0.85674025
4 49.812 0.512457 9310.152 463757.5197 2520525.346 500.1042 1.14094716
5 49.812 0.510562 −189.533 −9441.03806 2511584.412 498.3302 1.09594084
6 49.812 0.50857 −199.166 −9920.85732 2502161.885 496.4607 1.050302
7 49.812 0.506458 −211.274 −10524.0068 2492134.339 494.4711 1.0037909
8 49.812 0.504197 −226.099 −11262.4614 2481366.349 492.3346 0.95617771
9 49.812 0.501755 −244.195 −12163.8252 2469694.858 490.0188 0.90722097
10 49.812 0.49909 −266.461 −13272.9701 2456911.907 487.4825 0.85664953
11 49.812 0.496147 −294.287 −14659.016 2442740.373 484.6707 0.80414263
12 49.812 0.492849 −329.83 −16429.5232 2426795.521 481.507 0.74930366
13 49.812 0.489083 −376.578 −18758.1022 2408518.926 477.8807 0.6916212
14 49.812 0.484679 −440.473 −21940.8456 2387055.961 473.6222 0.63040576
15 49.6445 0.437237 −4744.15 −235520.787 2152008.796 426.9859 0.48920265
16 50.4651 0.652104 21486.72 1084329.656 3236765.438 642.2154 0.85542752
17 50.4651 0.669959 1785.5 90105.45326 3327513.107 660.2209 0.77757227
18 50.8786 0.82457 15461.07 786637.8791 4114811.207 816.4308 1.00123547
19 49.7406 0.380442 −44412.8 −2209118.24 1906509.4 378.2757 0.1734342
20 51.6391 1 61955.79 3199341.105 5106228.78 1013.141 1.6390968

Hedging cost = 106228.7799, discounted hedging cost = 105808.1141, and hedging error ratio = 0.115655486.

Based on stock prices simulated above, under the same financial environment as in the example 3.1 of [13], we compare
hedging error ratios on the delta hedging and our mixed hedging. In the numerical experiments for comparison, the
parameters are as follows; S0 = 49, K = 50, r = 0.05, µ = 0.11, σ = 0.2, α = 0.9, H = 0.8 (see Tables 4.1.1–4.1.6).
Under the above conditions, we calculate the delta hedging by ∆t = ∂∂VS t = N (d1 ) from (3.3) with ∆t = 1/252 years
t
(i.e., approximately one day). The price of the option under the delta hedging ∆t is about $95036.663. By Day20, the
total cost of writing the option and hedging is $109382.8577 (see Table 4.1.1). The total cost discounted at the time 0
is equal to $108949.70188, which is remarkably different from the $95036.663, because the option is hedged on the
delta hedging strategy ∆t . The error ratio of delta hedging is also remarkably large, it is equal to (108949.70188 −
95036.663)/95036.663 = 0.146396541.
5
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 4.1.3
Simulation of delta hedging per week with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility σ =
0.2 per annum, and T = 20/52 years.
Week Stock price Delta hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 49 0.524977 52497.71 2572388 2572388 2473.45 2.697597
1 48.34867 0.48135 −4362.71 −210931 2363930 2273.01 2.254011
2 49.2518 0.532749 5139.937 253151.1 2619355 2518.61 2.606265
3 49.67447 0.556029 2327.976 115641 2737514 2632.225 2.730176
4 48.96977 0.506434 −4959.5 −242866 2497281 2401.231 2.250138
5 47.54822 0.402545 −10388.9 −493975 2005707 1928.565 1.502854
6 46.63863 0.330005 −7253.98 −338316 1669320 1605.116 1.077868
7 46.18604 0.287466 −4253.95 −196473 1474452 1417.742 0.853297
8 45.21735 0.211128 −7633.77 −345179 1130691 1087.203 0.536568
9 44.48254 0.154046 −5708.15 −253913 877864.7 844.1007 0.340121
10 44.25504 0.12703 −2701.67 −119563 759146.3 729.9483 0.254658
11 44.68994 0.133189 615.9434 27526.47 787402.7 757.118 0.258499
12 44.25804 0.094574 −3861.5 −170902 617257.5 593.5168 0.15969
13 43.9751 0.066068 −2850.63 −125357 492494.3 473.5523 0.097179
14 44.11528 0.054263 −1180.45 −52076 440891.9 423.9345 0.071791
15 44.11528 0.037362 −1690.14 −74561.1 366754.7 352.6487 0.042664
16 44.11528 0.021724 −1563.79 −68987.1 298120.3 286.6541 0.020648
17 44.11528 9.07E−03 −1265.24 −55816.5 242590.4 233.26 6.77E−03
18 44.11528 1.69E−03 −738.443 −32576.6 210247.1 202.1607 8.85E−04
19 44.11528 1.34E−05 −167.372 −7383.64 203065.6 195.2554 3.76E−06
20 44.11528 0.00E+00 −1.34E+00 −59.1805 203201.7 195.3862 0.00E+00

Hedging cost = 203201.677, discounted hedging cost = 199333.129, and hedging error ratio = −0.261071

Table 4.1.4
Simulation of our mixed hedging per week with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility
σ = 0.2 per annum, and T = 20/52 years.
Week Stock price Mixed hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased Including interest
0 49 0.524801 52480.09 2571524 2571524 2472.62 2.681909
1 48.34867 0.491161 −3363.98 −162644 2411353 2318.609 2.239613
2 49.2518 0.542467 5130.624 252692.4 2666364 2563.812 2.592359
3 49.67447 0.565744 2327.683 115626.4 2784554 2677.456 2.716882
4 48.96977 0.516038 −4970.65 −243412 2543820 2445.981 2.237493
5 47.54822 0.411455 −10458.3 −497272 2048994 1970.186 1.491476
6 46.63863 0.338158 −7329.7 −341847 1709117 1643.382 1.0679
7 46.18604 0.295148 −4301.01 −198647 1512114 1453.955 0.844441
8 45.21735 0.217505 −7764.26 −351079 1162488 1117.777 0.529579
9 44.48254 0.159238 −5826.76 −259189 904417 869.6318 0.334772
10 44.25504 0.13169 −2754.74 −121911 783375.6 753.2458 0.250247
11 44.68994 0.138337 664.6691 29704.02 813832.8 782.5316 0.254166
12 44.25804 0.098703 −3963.38 −175412 639203.8 614.6191 0.156549
13 43.9751 0.069342 −2936.09 −129115 510703.4 491.061 0.094973
14 44.11528 0.05729 −1205.21 −53168.4 458026.1 440.4097 0.070048
15 44.11528 0.039792 −1749.85 −77194.9 381271.6 366.6073 0.041495
16 44.11528 0.023434 −1635.75 −72161.6 309476.6 297.5737 0.019987
17 44.11528 9.99E−03 −1344.56 −59315.5 250458.7 240.8257 6.50E−03
18 44.11528 1.93E−03 −805.784 −35547.4 215152.1 206.8771 8.37E−04
19 44.11528 1.70E−05 −191.369 −8442.28 206916.7 198.9584 3.40E−06
20 44.11528 0.00E+00 −1.70E+00 −74.829 207040.9 199.0778 0.00E+00

Hedging cost = 207040.8679, discounted Hedging cost = 203099.2293, and hedging error ratio = −0.242706

Now, we calculate mixed hedging and option prices by formulas (3.1) and (3.3) with ∆t = 1/252 years. The price of
the option under our mixed hedging Xt is about $94839.415. By Day 20, the total cost of writing the option and hedging
is $106228.7799 (see Table 4.1.2).
The total cost discounted at the time 0 is equal to $105808.1141, which is close to Xt hedging option price $94839.415.
As a result, the error ratio of mixed hedging Xt is remarkably smaller than that of the former ∆t ; it is equal to
(105808.1141 − 94839.415)/94839.415 = 0.115655486.
It is remarkably smaller than that of the former ∆t ; thus it is obvious that our mixed hedging Xt is better than the
delta hedging ∆t due to the aim and the essential of the mixed hedging.
– In the case of the weekly hedging strategy
– In the case of the monthly mixed hedging strategy
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 4.1.5
Simulation of delta hedging per month with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility σ
= 0.2 per annum, and T = 20/12 years.
Month Stock price Delta hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 49 0.642176 64217.64 3146664 3146664 13111.1 6.994307
1 48.52135 0.624144 −1803.26 −87496.6 3072279 12801.16 6.404912
2 47.62535 0.591695 −3244.85 −154537 2930543 12210.6 5.598941
3 48.16398 0.602009 1031.369 49674.82 2992428 12468.45 5.664017
4 46.29737 0.532836 −6917.27 −320252 2684645 11186.02 4.352322
5 44.88371 0.471852 −6098.43 −273720 2422111 10092.13 3.404116
6 45.32003 0.476721 486.9433 22068.28 2454271 10226.13 3.377719
7 46.74539 0.52042 4369.879 204271.7 2668769 11119.87 3.842401
8 45.58969 0.46266 −5776.04 −263328 2416561 10069.01 3.023615
9 43.92108 0.377291 −8536.9 −374950 2051680 8548.668 2.087922
10 47.40575 0.514369 13707.82 649829.4 2710058 11291.91 3.388342
11 46.54574 0.461859 −5250.99 −244411 2476939 10320.58 2.69288
12 45.86856 0.411937 −4992.24 −228987 2258273 9409.471 2.126569
13 42.54072 0.227734 −18420.3 −783611 1484071 6183.631 0.833647
14 41.25691 0.145634 −8210.06 −338722 1151533 4798.056 0.429062
15 37.83045 0.032494 −11314 −428013 728318.6 3034.661 0.06198
16 37.80458 0.016914 −1557.96 −58898 672455.3 2801.897 0.026651
17 37.41658 4.52E−03 −1239.85 −46391.1 628866.1 2620.275 5.35E−03
18 37.41658 5.32E−04 −398.351 −14904.9 616581.4 2569.089 4.39E−04
19 37.41658 1.09E−06 −53.102 −1986.9 617163.6 2571.515 4.75E−07
20 36.19133 0.00E+00 −1.09E−01 −3.96265 619731.2 2582.213 0.00E+00

Hedging cost = 619731.1614, discounted Hedging cost = 570278.9177, and hedging error ratio = −0.184652

Table 4.1.6
Simulation of our mixed hedging per month with an exercise price K = 50, risk-free rate r = 0.05 per annum, µ = 0.11 per annum, volatility
σ = 0.2 per annum, and T = 20/12 years.
Month Stock price Delta hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 49 0.642765 64276.45 3149546 3149546 13123.11 6.89742
1 48.52135 0.64256 −20.4443 −991.984 3161677 13173.66 6.314516
2 47.62535 0.609354 −3320.65 −158147 3016704 12569.6 5.512758
3 48.16398 0.61966 1030.651 49640.25 3078914 12828.81 5.581494
4 46.29737 0.549966 −6969.39 −322665 2769078 11537.83 4.274284
5 44.88371 0.488253 −6171.36 −276994 2503622 10431.76 3.331844
6 45.32003 0.493658 540.5848 24499.32 2538553 10577.31 3.308039
7 46.74539 0.538652 4499.388 210325.6 2759456 11497.73 3.773883
8 45.58969 0.480499 −5815.37 −265121 2505833 10440.97 2.960293
9 43.92108 0.393661 −8683.8 −381402 2134872 8895.299 2.032653
10 47.40575 0.534813 14115.27 669144.8 2812912 11720.47 3.329107
11 46.54574 0.482412 −5240.09 −243904 2580728 10753.03 2.638398
12 45.86856 0.432501 −4991.08 −228934 2362548 9843.95 2.07738
13 42.54072 0.242146 −19035.5 −809785 1562607 6510.862 0.800943
14 41.25691 0.156401 −8574.53 −353759 1215359 5063.995 0.407096
15 37.83045 0.035304 −12109.7 −458115 762307.7 3176.282 0.056282
16 37.80458 0.018657 −1664.66 −62931.7 702552.3 2927.301 0.023754
17 37.41658 5.09E−03 −1356.88 −50769.9 654709.7 2727.957 4.59E−03
18 37.41658 6.22E−04 −446.648 −16712 640725.6 2669.69 3.53E−04
19 37.41658 1.36E−06 −62.0697 −2322.44 641072.8 2671.137 3.17E−07
20 36.19133 0.00E+00 −1.36E−01 −4.92982 643739 2682.246 0.00E+00

Hedging cost = 643739.0383, discounted Hedging cost = 592371.0552 and hedging error ratio = −0.141170

From Tables 4.1.1–4.1.6, we know that our mixed hedging is better than delta hedging with respect to hedging error
ratio in some cases.
– Resuming Table and synthetic analysis
Table 4.1.7 synthetically shows hedging error ratios for above simulated daily, weekly and monthly hedging strategy.
For all scaling parameter, the absolute values of hedging error ratios under delta hedging are greater than that under
mixed hedging. Moreover, the greater scaling parameter brings greater differences of absolute values of two hedging error
ratios. This is right in the financial view.

4.1.3. The influence of parameters

– Effects of Hurst parameter H
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 4.1.7
Hedging error ratio for daily, weekly and monthly hedging strategy.
Scaling Hedging error ratio of Hedging error ratio of Difference of absolute values of
Delta hedging Mixed hedging two hedging error ratios
Day 0.146396541 0.115655486 0.030741055
Week −0.261071 −0.242706 0.018365
Month −0.184652 −0.141170 0.043482

Table 4.1.8
Performance of delta hedging and mixed hedging per month across H (H ∆t = 1/12).
Delta hedging Mixed hedging
H Hedging cost Effective cost Hedging error ratio Hedging cost Effective cost Hedging error ratio
0.6 645138.1461 −181597.2623 −0.23424 666957.5842 −152362.0232 −0.19888
0.65 636720.7285 −163959.2187 −0.21865 659271.8372 −133882.7839 −0.180789
0.7 629817.8232 −149731.0893 −0.20531 652969.3827 −118956.6001 −0.165258
0.75 624222.3292 −138300.619 −0.19405 647854.5102 −106962.6924 −0.152126
0.8 619731.1615 −129151.8301 −0.18465 643739.0384 −97370.94035 −0.14117
0.85 616155.7424 −121853.6629 −0.1769 640450.7089 −89733.19583 −0.13214
0.9 613328.2299 −116048.8644 −0.17055 637837.7772 −83674.42271 −0.124773

Fig. 2. Hedging error ratio across H.

At first, we investigate effects of Hurst parameter H when H only varies from 0.6 to o.9 (S0 = 49, r = 0.05, K = 50,
α = 0.9, µ = 0.11).
From Table 4.1.8, we know that the Hurst parameter H plays an important role in hedging costs, effective costs and
hedging error ratios. Below we show the result of Table 4.1.8 in a graphical way.
Next, we investigate influences on mixed hedging of the parameters K , µ, α using weekly stock prices with upward
trend.
– The influence of K (µ, α and H is fixed, K only varies (S0 = 49, r = 0.05, µ = 0.11, α = 0.9, H = 0.8) (see Figs. 3–5.)
- K , H and α are fixed, µ only varies (S0 = 49, r = 0.05, K = 50, H = 0.8, α = 0.9)
– K , H and µ are fixed, α only varies (S0 = 49, r = 0.05, H = 0.8, K = 50, µ = 0.11)
In Table 4.1.10, it has been shown that risk preference parameter µ has an important influence on the effective cost
and the hedging error ratio in the case of the mixed hedging, even if it does not play any role in the case of the delta
hedging.
In addition, we see in Table 4.1.11 that stability parameter α plays an important role in the mixed hedging as well as
in delta hedging.
From Tables 4.1.9–4.1.11, we know that the absolutes of hedging error ratios under our mixed hedging are remarkably
smaller than that under delta hedging. Therefore, we assure that the mixed hedging strategy is better than delta hedging
in the time-changed mixed fractional Brownian model.
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 4.1.9
Performance of delta hedging and mixed hedging per month across different exercise price K (∆t = 1/12).
Exercise price K Delta hedging Mixed hedging
In the money Hedging cost Effective cost Hedging error ratio Hedging cost Effective cost Hedging error ratio
30 2313495.884 −19300.467 −0.00898 2316157.745 −15889.80111 −0.00740
35 1716629.628 −134700.851 −0.07857 1735563.793 −114546.143 −0.06692
Out of the money
40 1262383.745 −156526.366 −0.11874 1294971.869 −121242.429 −0.09235
45 919000.922 −131128.926 −0.13424 949316.622 −95353.619 −0.09841
50 619731.162 −129151.830 −0.18465 643739.038 −97370.940 −0.14117

Table 4.1.10
Performance of delta hedging and mixed hedging per month across µ (∆t = 1/12).
µ Delta hedging Mixed hedging
Hedging cost Effective cost Hedging error ratio Hedging cost Effective cost Hedging error ratio
0.08 637925.213 −107869.983 −0.15523
0.09 639919.917 −104529.128 −0.15075
0.1 641857.424 −101030.304 −0.14607
0.11 619731.162 −129151.830 −0.18465 643739.038 −97370.940 −0.14117
0.12 645566.021 −93548.227 −0.13605
0.13 647339.594 −89559.101 −0.13070

Fig. 3. Hedging error ratio across K .

4.2. Comparison of two mixed hedging strategies in the different models

We compare the mixed hedging of [13] in Brownian motion model and our mixed hedging in the time-changed
Brownian motion model, not time-changed mixed fractional Brownian motion model, since although the model is simple,
it is enough to make clear inherent nature of time-changed dynamic.
We simulate the stock prices driven by the time-changed Brownian motion model in similar way to 4.1.1. Table 4.2.1
shows 20 simulated daily, weekly and monthly stock prices.
Based on these simulated stock prices, we calculate the mixed hedging of [13] and our mixed hedging strategies
respectively and display hedging error ratios. Table 4.2.2 shows synthetically hedging error ratios on daily, weekly and
monthly hedging strategies.
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Fig. 4. Hedging error ratio across µ.

Table 4.1.11
Performance of delta hedging and mixed hedging per month across α (∆t = 1/12).
α Delta hedging Mixed hedging
Hedging cost Effective cost Hedging error ratio Hedging cost Effective cost Hedging error ratio
0.5 562956.2128 −173468.9271 −0.2508577 603844.8415 −78404.3398 −0.1236536
0.55 571504.5959 −160960.65 −0.2343423 610578.9616 −87300.7711 −0.1344831
0.6 579658.1284 −153150.8844 −0.2230717 616748.8084 −92456.48291 −0.1400875
0.65 587395.9584 −147476.598 −0.2143554 622377.8943 −95286.8932 −0.1426448
0.7 594707.3428 −142931.9534 −0.2070926 627501.9454 −96736.72496 −0.1434909
0.75 601590.2835 −139038.889 −0.2007421 632161.0722 −97403.114 −0.1434255
0.8 608049.0919 −135538.4516 −0.1950004 636395.5085 −97629.57619 −0.1428914
0.85 614092.3093 −132275.957 −0.1896794 640243.2781 −97592.7931 −0.1421088
0.9 619731.1617 −129151.8299 −0.1846528 643739.0386 −97370.9401 −0.1411701
0.95 624978.4717 −126098.12 −0.1798304 646913.6409 −96991.5063 −0.1401037

From Table 4.2.2, we know that all the absolutes of hedging error ratios under time-changed Brown model are much
less than that under Brown model, thus we conclude that our mixed hedging is meaningful in the dynamic of stock prices
exhibiting periods of constant values.

5. Empirical application

5.1. Performance of delta hedging and mixed hedging in time-changed mixed fractional Brownian motion model for exchange
rates

Fig. 2 shows the graph of EUR/USD exchange rates from 01/02/2014 to 28/02/2014. At a glance in Fig. 2, they seem to
exhibit some constant periods and to be smoother than usual behavior, moreover, to have the long-range dependence.
Therefore, we can assume that the EUR/USD exchange rates are generated by time-changed mixed fractional Brownian
motion model. The beginning times of constant periods are t = 0.411, t = 0.563, t = 0.981, t = 1.549, t = 1.995,
t = 2.287. We analyze EUR/USD exchange rates from 02/01/2014 to 31/05/2014 to estimate the stability parameter α . At
first, using the data set, we obtain samples Ti of waiting times until the next jump occurs and a constant period follows
after the jump. Next, we estimate α by using the method of [32]. The result is α̂ = 0.8752.
The rest parameters including the Hurst parameter H are estimated by applying the maximum likelihood method to
log returns of exchange rates. The estimates are µ̂ = 0.009, σ̂ = 0.037, H = 0.7796 (see Fig. 6.)
We test performance of delta hedging and mixed hedging for a currency call option based on weekly EUR/USD exchange
rates from 03/01/2014 to 23/05/2014. As well as mentioned above, from Tables 5.1.1 and 5.1.2, we can know that our
mixed hedging strategy is an improvement over the delta hedging in some sense.
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Fig. 5. Hedging error ratio across α .

Table 4.2.1
Simulated daily, weekly and monthly stock prices by time-changed Brown model.
Day Stock price Week Stock price Month Stock price
∆t = 1/252 ∆t = 1/52 ∆t = 1/12
0 49 0 49 0 49
1 48.614 1 47.624 1 39.251
2 51.034 2 48.404 2 33.149
3 49.626 3 54.35 3 33.637
4 50.987 4 52.989 4 34.442
5 51.315 5 53.819 5 35.59
6 51.576 6 53.782 6 37.792
7 51.417 7 54.621 7 39.229
8 52.235 8 55.645 8 39.229
9 51.772 9 55.89 9 39.229
10 51.928 10 57.071 10 39.376
11 51.081 11 57.071 11 43.519
12 51.633 12 56.65 12 40.888
13 49.654 13 59.546 13 43.567
14 49.654 14 59.798 14 43.567
15 49.654 15 59.798 15 43.567
16 49.654 16 59.798 16 49.276
17 49.654 17 59.798 17 45.277
18 49.033 18 58.234 18 46.622
19 47.685 19 55.805 19 45.635
20 47.163 20 59.461 20 48.022

Table 4.2.2
Hedging error ratios on two mixed hedging strategies.
Scaling Brown model Time-changed Brown model
Day 1.00570469 0.552349562
Week 0.31735879 0.222520349
Month −0.0601821 −0.02654104

5.2. Comparison of two mixed hedging strategies in different models for exchange rates

We also compare performances of two mixed hedging strategies from Brownian motion model and time-changed
Brownian motion model for above exchange rates. Tables 5.2.1 and 5.2.2 show the results.
In Table 5.2.3, we resume results for empirical application in Section 5.
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K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Fig. 6. EUR/USD exchange rates from 01/02/2014 to 28/02/2014.

Table 5.1.1
Delta hedging per week with an exercise price K = 1.37, risk-free rate r = 0.005 per annum, µ = 0.009 per annum, volatility σ = 0.037
per annum, and T = 20/52 years.
Week Date EUR/USD Delta hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 2014.01.03 1.3662 0.492364 49236.41 67266.78 67266.78 6.46796 0.013826
1 2014.01.10 1.36049 0.424844 −6752.02 −9186.06 58087.19 5.585307 0.010605
2 2014.01.17 1.36176 0.435293 1044.92 1422.93 59515.71 5.722664 0.010638
3 2014.01.24 1.36941 0.524956 8966.34 12278.6 71800.02 6.903849 0.013796
4 2014.01.31 1.35504 0.344353 −18060.3 −24472.5 47334.43 4.551388 0.007059
5 2014.02.07 1.35901 0.386583 4222.986 5739.08 53078.06 5.10366 0.008044
6 2014.02.14 1.36795 0.501403 11482 15706.8 68789.96 6.61442 0.011502
7 2014.02.21 1.37182 0.554258 5285.54 7250.809 76047.39 7.312249 0.013016
8 2014.02.28 1.37082 0.539574 −1468.42 −2012.94 74041.76 7.1194 0.01193
9 2014.03.07 1.3857 0.750536 21096.21 29233.02 103281.9 9.930952 0.021033
10 2014.03.14 1.38665 0.771358 2082.198 2887.28 106179.1 10.20953 0.021262
11 2014.03.21 1.37781 0.654759 −11659.9 −16065.1 90124.2 8.665789 0.014394
12 2014.03.28 1.37408 0.596665 −5809.37 −7982.53 82150.33 7.89907 0.011456
13 2014.04.04 1.37195 0.559394 −3727.18 −5113.5 77044.73 7.408147 0.009582
14 2014.04.11 1.38863 0.850906 29151.28 40480.34 117532.5 11.3012 0.020888
15 2014.04.18 1.38135 0.761003 −8990.39 −12418.9 105124.9 10.10816 0.014434
16 2014.04.25 1.38311 0.815845 5484.289 7585.375 112720.4 10.8385 0.015185
17 2014.05.02 1.38679 0.904309 8846.326 12268 124999.2 12.01916 0.017784
18 2014.05.09 1.38396 0.90776 345.0995 477.6039 125488.8 12.06624 0.014689
19 2014.05.16 1.37101 0.561166 −34659.4 −47518.3 77982.59 7.498326 0.003618
20 2014.05.23 1.36556 0 −56116.6 −76630.6 1359.48 0.130719 0

Hedging cost = 1359.47954, discounted Hedging cost = 1356.867794, and hedging error ratio = −0.018639557.

As we can see from Table 5.2.3, the more general model we discuss, the smaller hedging error ratio we have, thus
hedging error ratio by mixed hedging in the time-changed mixed fractional Brownian motion model is the least. This
seems to imply that our mixed hedging is the best for asset dynamics exhibiting the periods of constant values and long
range dependence.

6. Conclusions

This paper deals with a mixed hedging strategy and a pricing formula for the European call option in the discrete time
under the time-changed mixed fractional Brownian model. It has been shown that in the discrete time case, a stability
parameter α and a Hurst index H as well as a risk preference parameter µ and a fractal scaling ∆t play important roles in
option pricing under the mixed hedging strategy. In particular, through some numerical studies and empirical analysis for
12
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 5.1.2
Mixed hedging per week with an exercise price K = 1.37, risk-free rate r = 0.005 per annum, µ = 0.009 per annum, volatility σ = 0.037
per annum, and T = 20/52 years.
Week Date EUR/USD Mixed hedging Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 2014.01.03 1.3662 0.492347 49234.72 67264.47 67264.47 6.467738 0.013813
1 2014.01.10 1.36049 0.429651 −6269.61 −8529.75 58741.19 5.648192 0.010593
2 2014.01.17 1.36176 0.439881 1023.022 1393.11 60139.95 5.782688 0.010627
3 2014.01.24 1.36941 0.529595 8971.356 12285.47 72431.2 6.964538 0.013785
4 2014.01.31 1.35504 0.348498 −18109.7 −24539.4 47898.77 4.605651 0.00705
5 2014.02.07 1.35901 0.390965 4246.774 5771.408 53674.79 5.161037 0.008035
6 2014.02.14 1.36795 0.506137 11517.18 15754.92 69434.87 6.67643 0.011493
7 2014.02.21 1.37182 0.55909 5295.275 7264.164 76705.71 7.375549 0.013008
8 2014.02.28 1.37082 0.544544 −1454.6 −1994 74719.09 7.184528 0.011922
9 2014.03.07 1.3857 0.754775 21023.15 29131.78 103858.1 9.986351 0.021027
10 2014.03.14 1.38665 0.775561 2078.548 2882.219 106750.3 10.26445 0.021257
11 2014.03.21 1.37781 0.659999 −11556.2 −15922.3 90838.23 8.734445 0.014388
12 2014.03.28 1.37408 0.602404 −5759.48 −7913.98 82932.98 7.974325 0.011449
13 2014.04.04 1.37195 0.565564 −3683.98 −5054.24 77886.72 7.489107 0.009576
14 2014.04.11 1.38863 0.854948 28938.42 40184.76 118079 11.35375 0.020885
15 2014.04.18 1.38135 0.766783 −8816.52 −12178.7 105911.6 10.18381 0.01443
16 2014.04.25 1.38311 0.821377 5459.41 7550.964 113472.8 10.91084 0.015182
17 2014.05.02 1.38679 0.908393 8701.628 12067.33 125551 12.07221 0.017782
18 2014.05.09 1.38396 0.91257 417.7013 578.0819 126141.2 12.12896 0.014688
19 2014.05.16 1.37101 0.576842 −33572.8 −46028.7 80124.63 7.704291 0.003616
20 2014.05.23 1.36556 0 −57684.2 −78771.3 1361.066 0.130872 0

Hedging cost = 1361.065515, discounted Hedging cost = 1358.450722, and hedging error ratio = −0.016543882.

Table 5.2.1
Mixed hedging in the Brownian motion model per week with an exercise price K = 1.37, risk-free rate r = 0.005 per annum, µ = 0.009
per annum, volatility σ = 0.037 per annum, and T = 20/52 years.
Week Date EUR/USD [13] Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 2014.01.03 1.3662 0.489711 48971.06 66904.26 66904.26 6.433102 0.011929
1 2014.01.10 1.36049 0.416446 −7326.47 −9967.59 56943.11 5.475299 0.008978
2 2014.01.17 1.36176 0.429003 1255.751 1710.031 58658.61 5.640251 0.00914
3 2014.01.24 1.36941 0.53017 10116.67 13853.87 72518.13 6.972897 0.012386
4 2014.01.31 1.35504 0.329385 −20078.5 −27207.1 45317.95 4.357496 0.005873
5 2014.02.07 1.35901 0.376651 4726.538 6423.412 51745.72 4.97555 0.006889
6 2014.02.14 1.36795 0.504279 12762.84 17458.92 69209.62 6.654771 0.010368
7 2014.02.21 1.37182 0.56278 5850.126 8025.32 77241.59 7.427076 0.011969
8 2014.02.28 1.37082 0.546676 −1610.4 −2207.56 75041.46 7.215525 0.010953
9 2014.03.07 1.3857 0.77364 22696.41 31450.41 106499.1 10.2403 0.020316
10 2014.03.14 1.38665 0.794765 2112.507 2929.308 109438.6 10.52295 0.020632
11 2014.03.21 1.37781 0.671745 −12302.1 −16949.9 92499.22 8.894156 0.013678
12 2014.03.28 1.37408 0.609211 −6253.39 −8592.66 83915.46 8.068794 0.010765
13 2014.04.04 1.37195 0.569067 −4014.39 −5507.54 78415.99 7.539999 0.008942
14 2014.04.11 1.38863 0.873152 30408.47 42226.11 120649.6 11.60093 0.02056
15 2014.04.18 1.38135 0.783005 −9014.67 −12452.4 108208.8 10.40469 0.014036
16 2014.04.25 1.38311 0.838489 5548.421 7674.077 115893.3 11.14359 0.014891
17 2014.05.02 1.38679 0.923372 8488.263 11771.44 127675.9 12.27653 0.01763
18 2014.05.09 1.38396 0.926807 343.4977 475.3871 128163.5 12.32342 0.01457
19 2014.05.16 1.37101 0.57882 −34798.7 −47709.3 80466.53 7.737167 0.003411
20 2014.05.23 1.36556 0 −57882 −79041.3 1432.946 0.137783 0

Hedging cost = 1432.946468, discounted Hedging cost = 1430.193582, and hedging error ratio = 0.198923066.

stock prices exhibiting periods of constant values and long-range dependence, we show that our mixed hedging strategy is
better than delta hedging under our model and mixed hedging under Brownian motion model in some cases. Meanwhile,
in the continuous time case, the prices of the European call option are the same under the delta hedging and our mixed
hedging.

Appendix

Proof of Theorem 3.1.

Applying the Taylor series expansion, after a small time interval ∆t, the price changes in the bond and in the stock
are
∆Qt = rQt ∆t + o(∆t) (A.1)
13
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Table 5.2.2
Mixed hedging in the time-changed Brownian motion model per week with an exercise price K = 1.37, risk-free rate r = 0.005 per annum,
µ = 0.009 per annum, volatility σ = 0.037 per annum, and T = 20/52 years.
Week Date EUR/USD X (t) Shares Cost of shares Cumulative cost Interest cost Option price
purchased purchased including interest
0 2014.01.03 1.3662 0.49129 49129.02 67120.06 67120.06 6.453852 0.01301
1 2014.01.10 1.36049 0.424962 −6632.8 −9023.85 58102.66 5.586795 0.009851
2 2014.01.17 1.36176 0.435827 1086.485 1479.531 59587.78 5.729594 0.009912
3 2014.01.24 1.36941 0.530681 9485.347 12989.33 72582.84 6.979119 0.013086
4 2014.01.31 1.35504 0.339806 −19087.4 −25864.2 46725.6 4.492846 0.006438
5 2014.02.07 1.35901 0.384422 4461.54 6063.278 52793.37 5.076286 0.007421
6 2014.02.14 1.36795 0.505941 12151.89 16623.18 69421.63 6.675157 0.010874
7 2014.02.21 1.37182 0.561867 5592.606 7672.048 77100.36 7.413496 0.012419
8 2014.02.28 1.37082 0.546526 −1534.07 −2102.93 75004.84 7.212004 0.011358
9 2014.03.07 1.3857 0.76635 21982.41 30461.03 105473.1 10.14164 0.020598
10 2014.03.14 1.38665 0.787645 2129.504 2952.877 108436.1 10.42655 0.02087
11 2014.03.21 1.37781 0.667941 −11970.4 −16492.9 91953.62 8.841694 0.013941
12 2014.03.28 1.37408 0.607524 −6041.76 −8301.86 83660.6 8.044289 0.011009
13 2014.04.04 1.37195 0.568745 −3877.9 −5320.29 78348.36 7.533496 0.009159
14 2014.04.11 1.38863 0.867625 29888.04 41503.43 119859.3 11.52493 0.020662
15 2014.04.18 1.38135 0.778584 −8904.08 −12299.6 107571.2 10.34338 0.014157
16 2014.04.25 1.38311 0.834046 5546.172 7670.966 115252.5 11.08197 0.014975
17 2014.05.02 1.38679 0.919693 8564.716 11877.46 127141 12.2251 0.017671
18 2014.05.09 1.38396 0.923663 396.9908 549.4193 127702.7 12.27911 0.0146
19 2014.05.16 1.37101 0.580635 −34302.8 −47029.5 80685.44 7.758216 0.003462
20 2014.05.23 1.36556 0 −58063.5 −79289.2 1404.025 0.135002 0

Hedging cost = 1404.024787, discounted Hedging cost = 1401.327464, and hedging error ratio = 0.077074343.

Table 5.2.3
Synthetic results for empirical application for exchange rates.
Model Hedging Hedging error ratio
Brownian motion model Mixed hedging 0.198923066
(Table 5.2.1)
Time-changed Brownian motion model Mixed hedging 0.077074343
(Table 5.2.2)
Time-changed mixed fractional Brownian Delta hedging −0.018639557
motion model (Table 5.1.1)
Mixed hedging −0.016543882
(Table 5.1.2)

and

∆St = St (eµ∆Tα (t)+σ ∆Mα,H (t) − 1)

( )
1
= St µ∆Tα (t) + σ ∆Mα,H (t) + (µ∆Tα (t) + σ ∆Mα,H (t))2 (A.2)
2
1
+ St eθ µ∆Tα (t)+θ σ ∆Mα,H (t) (µ∆Tα (t) + σ ∆Mα,H (t))3 ,
6
where θ ∈ (0, 1) is a random variable corresponding to the process St .
By Lemmas 1, 2, 4 of [27]
1 3
(µ∆Tα (t) + σ ∆Mα,H (t))3 = (o(∆t α−ε ) + o(∆t 2 α−ε ))3 = o(∆t 2 α−3ε ). (A.3)

By the assumption α > 2

3
, and Eqs. (A.2) and (A.3), we have
( )
1 2
∆St = St µ∆Tα (t) + σ ∆Mα,H (t) + σ (∆Mα,H (t)) + o(∆t).
2
(A.4)
2

Similarly, we can obtain that

3
(∆St )2 = St 2 [e2µ∆Tα (t)+2σ ∆Mα,H (t) − 2eµ∆Tα (t)+σ ∆Mα,H (t) + 1] = St 2 [(µ∆Tα (t) + σ ∆Mα, H (t))2 + o(∆t 2 α−3ε )] =
3
= St 2 [µ2 (∆Tα (t))2 + σ 2 (∆Mα, H (t))2 + 2µσ ∆Tα (t)∆Mα, H (t) + o(∆t 2 α−3ε )] , (A.5)
3
α−3ε
= St 2 σ 2 (∆Mα,H (t))2 + o(∆t 2 ) = St 2 σ 2 (∆Mα,H (t))2 + o(∆t)
14
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Consider a replicating portfolio Πt with Xt units of the stock and risk-less bond with value Qt . The value of the portfolio
is given by
Πt = Xt St + Qt .
After the time interval ∆t, the change in the value of the portfolio is
∆Πt = Xt ∆St + ∆Qt . (A.6)
Since the price Vt = V (t , St ) of the European call option has continuous partial derivatives up to order two, the change
in the price is
∂ Vt ∂ Vt 1 ∂ 2 Vt
∆Vt = ∆t + ∆St + (∆St )2 + o(∆t). (A.7)
∂t ∂ St 2 ∂ St 2
∂ Vt ∂ Vt 1 ∂ 2 Vt
( ) ( )
∆Vt − ∆Πt = − rQt ∆t + − Xt ∆St + (∆St )2 + o(∆t). (A.8)
∂t ∂ St 2 ∂ St 2
Now let denote
∂ Vt
A1 (t) = − rQt , (A.9)
∂t
∂ Vt
A2 (t) = − Xt , (A.10)
∂ St
and
1 ∂ 2 Vt
A3 (t) = . (A.11)
2 ∂ St 2
Then by using Eqs. (A.4), (A.5) and (A.8)–(A.11), we have.
[ ]
1
∆Vt − ∆Πt = A1 (t)∆t + A2 (t)St µ∆Tα (t) + σ ∆Mα,H (t) + σ (∆Mα,H (t))
2 2
2 , (A.12)
+ A3 (t)σ St (∆Mα,H (t)) + o(∆t)
2 2 2

Now, we will obtain a solution Xt that satisfies the following optimization problem for the minimum:
MinXt Var [∆Vt − ∆Πt ]
subject to
E [∆Vt − ∆Πt ] = 0, (A.13)
and
V (t , St ) = Πt = Xt St + Qt . (A.14)
At first, from Eq. (A.12), we have
t α−1
( )
1
E(∆Vt − ∆Πt ) = A1 (t)∆t + µSt A2 (t) σ 2 St A2 (t) + σ 2 St 2 A3 (t)
∆t +
Γ (α ) 2
(
α−1
( α−1 )2H ) . (A.15)
t t
· a 2
∆t + b 2
(∆t)2H
+ o(∆t) = 0
Γ (α ) Γ (α )
Since E [∆Vt − ∆Πt ] = 0, from Eq. (A.15) we have
)( )2H )
t α−1 t α−1 t α−1
( (
1
A1 (t) + µSt A2 (t) + σ St A2 (t) + σ St A3 (t)
2 2 2
a 2
+b 2
(∆t) 2H −1
= 0. (A.16)
Γ (α ) 2 Γ (α ) Γ (α )

Next, let us calculate E(∆Vt − ∆Πt )2 . If we take the square of both sides in Eq. (A.12) and note that E [∆Mα,H (t)] = 0 and
E [(∆Mα,H (t))3 ] = 0, we have
( )2
1
E(∆Vt − ∆Πt ) = E (µSt A2 (t)) (∆Tα (t)) +
2 2
σ St A2 (t) + σ St A3 (t)
2 2 2 2
(∆Mα,H (t))4
[
2
( )
1 2
+ 2A1 (t)∆t · σ St A2 (t) + σ 2 St 2 A3 (t) (∆Mα,H (t))2
2 . (A.17)
+ (σ (1 + µ∆Tα (t))St A2 (t) + 2µσ St 2 A3 (t)∆Tα (t))2 · (∆Mα,H (t))2
( ) ]
1 2
+ 2µSt A2 (t) σ St A2 (t) + σ 2 St 2 A3 (t) ∆Tα (t) · (∆Mα,H (t))2 + o(∆t)
2
15
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

If we ignore of o(∆t) in Eq. (A.17) and apply Eq. (A.15), we have

Var(∆Vt − ∆Πt ) = E(∆Vt − ∆Πt )2 − (E(∆Vt − ∆Πt ))2
= E (σ (1 + µ∆Tα (t))St A2 (t) + 2µσ St 2 A3 (t)∆Tα (t))2 (∆Mα,H (t))2
[
( ) ]
1 2
+ 2µSt A2 (t) σ St A2 (t) + σ St A3 (t) ∆Tα (t) · (∆Mα,H (t)) −
2 2 2
2
)( ]2H )
t α−1 t α−1 t α−1
( [
1
− 2µSt A2 (t) σ St A2 (t) + σ St A3 (t)
2 2 2
a 2
∆t + b 2
(∆t)2H
∆t
2 Γ (α ) Γ (α ) Γ (α )
+ o(∆t)
= σ 2 St 2 [A2 (t)]2 E(∆Mα,H (t))2 + µ2 σ 2 St 2 [A2 (t)]2 E ∆Tα (t) · (∆Mα,H (t))2
[ ]

+ 2µσ 2 St 2 [A2 (t)]2 E ∆Tα (t) · (∆Mα,H (t))2 + 4µ2 σ 2 St 4 [A3 (t)]2 E (∆Tα (t))2 (∆Mα,H (t))2
[ ] [ ]

+ 4µσ 2 St 3 A2 (t)A3 (t)E ∆Tα (t) · (∆Mα,H (t))2 + 4µσ 2 St 3 A2 (t)A3 (t)E (∆Tα (t))2 (∆Mα,H (t))2
[ ] [ ]
( )
1 2
+ 2µSt A2 (t) σ St A2 (t) + σ 2 St 2 A3 (t) · E ∆Tα (t) · (∆Mα,H (t))2 −
[ ]
2
)( ]2H )
t α−1 t α−1 t α−1
( [
1
− 2µSt A2 (t) σ 2 St A2 (t) + σ 2 St 2 A3 (t) a2 ∆t + b2 (∆t)2H ∆t
2 Γ (α ) Γ (α ) Γ (α )
+ o(∆t)
Now we estimate E [∆Tα (t) · (∆Mα,H (t))2 ] and E [(∆Tα (t))2 (∆Mα,H (t))2 ] to simplify the above Eq.
By using the properties of Gamma function and the fact that Tα (t) is α self-similar process, we have
E [∆Tα (t) · (∆Mα,H (t))2 ] = E [E [∆Tα (t) · (∆Mα,H (t))2 |∆Tα (t)]]
= E [∆Tα (t) · (a2 ∆Tα (t) + b2 (∆Tα (t))2H )]
= a2 E [(∆Tα (t))2 ] + b2 E [(∆Tα (t))2H +1 ]
= a2 ((t + ∆t)α − t α )2 E [(Tα (1))2 ] + b2 ((t + ∆t)α − t α )2H +1 E [(Tα (1))2H +1 ] .
α−1 2 α−1 Γ (2H + 2)
= a (α t ∆t + o(∆t))
2 2
+ b (α t ∆t + o(∆t))
2 2H +1
Γ (2α + 1) Γ ((2H + 1)α + 1)
α α−1 2α
2H
Γ (2H + 1) α−1
=a 2
(t ∆t) + b
2
(t ∆t) 2H +1
+ o(∆t)
Γ (2α ) Γ ((2H + 1)α )
And applying the similar way, we can obtain
E [(∆Tα (t))2 · (∆Mα,H (t))2 ] = E [E [(∆Tα (t))2 · (∆Mα,H (t))2 |∆Tα (t)]]
= E [(∆Tα (t))2 · (a2 ∆Tα (t) + b2 (∆Tα (t))2H )]
= a2 E [(∆Tα (t))3 ] + b2 E [(∆Tα (t))2H +2 ] .
α α 2H +1
Γ (2H + 2) α−1
= a2 (t α−1 ∆t)3 + b2 (t ∆t)2H +2 + o(∆t)
Γ (2α ) Γ ((2H + 2)α )
Next, let us denote
α (t α−1 )2 α 2H (t α−1 )2H +1 Γ (2H + 1) 2H
γ1 : = a2 ∆ t + b2 ∆t ,
Γ (2α ) Γ ((2H + 1)α )

α (t α−1 )3 α 2H +1 (t α−1 )2H +2 Γ (2H + 2) 2H +1

γ2 : = a2 (∆t)2 + b2 ∆t ,
Γ (2α ) Γ ((2H + 2)α )
then
Var(∆Vt − ∆Πt )
= σ 2 St 2 [A2 (t)]2 E(∆Mα,H (t))2 + µ2 σ 2 St 2 [A2 (t)]2 γ2 ∆t + 2µσ 2 St 2 [A2 (t)]2 γ1 ∆t
+ 4µ2 σ 2 St 4 [A3 (t)]2 γ2 ∆t + 4µσ 2 St 3 A2 (t)A3 (t)γ1 ∆t
.
( )
1 2
+ 4µ2 σ 2 St 3 A2 (t)A3 (t)γ2 ∆t + 2µSt A2 (t) σ St A2 (t) + σ 2 St 2 A3 (t) γ1 ∆t
2
)( ]2H )
t α−1 t α−1 t α−1
( [
1
− 2µSt A2 (t) σ St A2 (t) + σ St A3 (t)
2 2 2
a 2
∆t + b 2
(∆t) 2H
∆t + o(∆t)
2 Γ (α ) Γ (α ) Γ (α )
16
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

To minimize the value of the Var(∆Vt − ∆Πt ), we choose Xt such that it satisfies

∂[Var(∆Vt − ∆Πt )]
= 0.
∂ Xt
[ ( ( α−1 )2H )
α−1
∂ Var(∆Vt − ∆Πt ) 2 t t
= σ St a
2 2
∆t + b2
(∆t) 2H
+ µ2 σ 2 St 2 γ2 ∆t
∂ Xt Γ (α ) Γ (α )
( )2H )] (
t α−1 t α−1 t α−1 ∂ Vt
( )
+ 3µσ St γ1 ∆t − µσ St
2 2 2
∆t · a
2
∆t + b
2 2
(∆t) 2H
· 2Xt − 2
Γ (α ) Γ (α ) Γ (α ) ∂ St
[ ( 2H
)
t α−1 t α−1 t α−1
( )
− 6µσ 2 St 3 A3 (t)γ1 ∆t − 2µσ 2 St 3 ∆ t · a2 ∆ t + b2 (∆t)2H
Γ (α ) Γ (α ) Γ (α )
+ 4µ2 σ 2 St 3 A3 (t)γ2 ∆t ] + o(∆t) = 0
α−1
( α−1 )2H
Let us denote γ3 : = a2 tΓ (α ) + b2 tΓ (α ) (∆t)2H −1 , then

t α−1 ∂ Vt
( ) ( )
2σ 2 St 2γ3 + µ2 γ2 + 3µγ1 − µ ∆t · γ3 · Xt − ∆t
Γ (α ) ∂ St
∂ 2 Vt t α−1
( )
− µσ 2 St 3 3γ1 + 2µγ2 − ∆t · γ3 ∆t = 0.
∂ St 2 Γ (α )

Thus,
α−1
( )
∂ Vt 1 µ 3γ1 + 2µγ2 − tΓ (α) ∆t · γ3 ∂ 2 Vt
Xt = + · α−1
· S.
2 t
(A.18)
∂ St 2 γ3 + µ2 γ2 + 3µγ1 − µ t
∆t · γ 3 ∂ S t
Γ (α )

Proof of Corollary 3.1.

If α → 1, then Tα (t) converges to t and Mα,H (t) converges to MtH = aBt + bBH
t . Moreover, we get γ1 = a ∆t + b (∆t) ,
2 2 2H

γ2 = a (∆t) + b (∆t)
2 2 2 2H +1
, γ3 = a + b (∆t)
2 2 2H −1
.
Therefore, from Eq. (A.18)

∂ Vt 1 2µ(a2 ∆t + b2 (∆t)2H ) + 2µ(a2 (∆t)2 + b2 (∆t)2H +1 ) ∂ 2 Vt

Xt = + · 2 · St
∂ St 2 a + b (∆t)
2 2H −1 + 2µ(a ∆t + b (∆t) ) + µ (a (∆t) + b (∆t)
2 2 2H 2 2 2 2 2H +1 ) ∂ St 2
.
∂ Vt µ(1 + µ∆t)(a2 ∆t + b2 (∆t)2H ) ∂ 2 Vt ∂ Vt µ∆t ∂ 2 Vt
= + · S t = + · St
∂ St (1 + µ∆t)2 (a2 + b2 (∆t)2H −1 ) ∂ St 2 ∂ St 1 + µ∆t ∂ St 2

Proof of Theorem 3.2.

Substituting Eqs. (A.9)-(A.11) into Eq. (A.16)
) ( ( α−1 )2H )
t α−1 α−1
(
1 t t
A1 (t) + µSt A2 (t) + σ 2 St A2 (t) + σ 2 St 2 A3 (t) · a2 + b2 (∆t)2H −1
Γ (α ) 2 Γ (α ) Γ (α )

) α−1
∂ Vt ∂ Vt ∂ Vt 1 ∂ 2 Vt .
( ) ( ( ( ) )
t 1 2 (A.19)
= − rQt + µSt − Xt + σ St − Xt + σ 2 St 2 ·
∂t ∂ St Γ (α ) 2 ∂ St 2 ∂ St 2
( 2H
)
t α−1 t α−1
( )
· a2 + b2 (∆t)2H −1 = 0
Γ (α ) Γ (α )

α−1
3γ1 +2µγ2 − tΓ (α ) ∆t ·γ3
Now let us denote C : = α−1 , then the mixed hedging strategy Xt rewrites as
γ3 +µ2 γ2 +3µγ1 −µ tΓ (α ) ∆t ·γ3

∂ Vt µ ∂ 2 Vt
Xt = + ·C · St .
∂ St 2 ∂ St 2
17
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

Substituting this equation into Eq. (A.19), we have

) α−1
∂ Vt ∂ Vt ∂ Vt 2 2 1 ∂ Vt
2
( ) ( ( ( ) )
t 1 2
− rQt + µSt − Xt + σ St − Xt + σ St · ·
∂t ∂ St Γ (α ) 2 ∂ St 2 ∂ St 2
( ( α−1 )2H )
t α−1 t
· a2 + b2 (∆t)2H −1
Γ (α ) Γ (α )
) α−1
∂ Vt ∂ Vt ∂ Vt
( ( ( )
t 1 2
= − r(Xt St + Qt ) + rXt St + µSt − Xt + σ St − Xt +
∂t ∂ St Γ (α ) 2 ∂ St
) ( α−1
( α−1 )2H )
1 ∂ Vt
2
t t
+ σ 2 St 2 · · a2 + b2 (∆t)2H −1
2 ∂ St 2 Γ (α ) Γ (α )
∂ Vt ∂ Vt µ ∂ 2 Vt t α−1 µ ∂ 2 Vt
( )
= − rVt + rSt + ·C · S t − µ St · · C · St +
∂t ∂ St 2 ∂ St 2 Γ (α ) 2 ∂ St 2
( ( α−1 )2H )
α−1
1 2 2 ∂ 2 Vt µ ∂ 2 Vt
( )
1 2 2 t t
+ σ St − σ St · · C · St · a +b 2
(∆t) 2H −1
2 ∂ St 2 2 2 ∂ St 2 Γ (α ) Γ (α )
∂ Vt ∂ Vt 1 ∂ 2 Vt 2 1 2 2 t α−1 ∂ 2 Vt
= − rVt + rSt + r µC · St − µ C St · +
∂t ∂ St 2 ∂ St 2 2 Γ (α ) ∂ St 2
( ( α−1 )2H )
α−1
1 2 2 ∂ 2 Vt
( )
1 t t
+ σ St 1 − µC · a2 + b2 (∆t)2H −1
2 ∂ St 2 2 Γ (α ) Γ (α )

Therefore, we can obtain that

[ ) ( ( α−1 )2H )]
∂ Vt ∂ Vt 1 t α−1 α−1
∂ 2 Vt 2
(
1 2 t t
+ rSt + r µC − µ C
2
+ σ 1 − µC · a
2
+b 2
(∆t) 2H −1
St − rVt = 0.
∂t ∂ St 2 Γ (α ) 2 Γ (α ) Γ (α ) ∂ St 2
( ( α−1 )2H )
α−1 α−1
If we denote σ̂ 2 : = r µC − µ2 C tΓ (α ) + σ 2 1 − 12 µC · a2 tΓ (α ) + b2 tΓ (α ) (∆t)2H −1 , then
( )

∂ Vt ∂ Vt 1 ∂ 2 Vt 2
+ rSt + σ̂ 2 St − rVt = 0. (A.20)
∂t ∂ St 2 ∂ St 2
From Eq. (A.20), we obtain that

V (t , St ) = V0 (t , St ) = St N(d1 ) − Ke−r(T −t) N(d2 ),

where V0 (t , St ) denotes the Black–Scholes price of a European call with volatility σ̂ , thus

ln(St /K ) + r(T − t) + σ 2 /2 T
∫
d1 = , d2 = d1 − σ and σ = 2
σ̂ (s)ds.
σ t

Therefore, we complete the proof.

Proof of Corollary 3.3.

Let substitute γ1 = a2 ∆t + b2 (∆t)2H , γ2 = a2 (∆t)2 + b2 (∆t)2H +1 , γ3 = a2 + b2 (∆t)2H −1 in Eq. (3.3).
Then
2(a2 ∆t + b2 (∆t)2H ) + 2(a2 (∆t)2 + b2 (∆t)2H +1 )
C =
a2 + + 2µ(a2 ∆t + b2 (∆t)2H ) + µ2 (a2 (∆t)2 + b2 (∆t)2H +1 )
b2 (∆t)2H −1
.
2(1 + µ∆t)(a ∆t + b2 (∆t)2H )
2
2∆t
= =
(1 + µ∆t)2 (a2 + b2 (∆t)2H −1 ) 1 + µ∆t
Thus,
2∆t 2∆t 2∆t
( )
1
σ̂ 2 = r µ − µ2 + σ2 1 − µ · (a2 + b2 (∆t)2H −1 )
1 + µ∆t 1 + µ∆t 2 1 + µ∆t
(
σ 2 (a2 +b2 (∆t)2H −1 )
) .
2 r −µ− 2
µ∆t
= σ (a + b (∆t)
2 2 2 2H −1
)+ = σ̂ 2
1 + µ∆t 1

The proof is completed.

18
K.-H. Kim, S.-H. Kim and H.-B. Jo Journal of Computational and Applied Mathematics 416 (2022) 114496

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