This thesis analyzes the valuation of a digital call embedded ELS and the performance of two hedging strategies from 25,000 simulation of stock price movements when hedging an European digital call option. The performance measure is the ratio of the standard deviation of the cost of hedging the digital call option to the Black-Scholes price of the option. Specifically, this thesis compares the mean and standard deviation of the hedging cost resulting from applying a delta hedge and static hedge to a digital call option. The results indicate that the delta hedge is superior when hedging the digital call option, and that the performance of delta hedging gets steadily better as the hedge is monitored more frequently.
