Robust static super-replication of barrier options

DOI10.1515/9783110208511MaRDI QIDQ2272291zbMATH OpenOpenAlexFDO

Authors Jan H. Maruhn

Publication date 11 August 2009

Published in Radon Series on Computational and Applied Mathematics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1515/9783110208511

zbMATH Keywords

barrier optionsrobust optimizationsemi-infinite optimizationsemidefinite programmingstatic hedgingstochastic volatility

Mathematics Subject Classification ID

Research exposition (monographs, survey articles) pertaining to calculus of variations and optimal control (49-02) Nonlinear programming (90C30) Semi-infinite programming (90C34) Research exposition (monographs, survey articles) pertaining to game theory, economics, and finance (91-02) Microeconomic theory (price theory and economic markets) (91B24) Derivative securities (option pricing, hedging, etc.) (91G20)

Review text

The book deals with the hedging of barrier options with the help of a portfolio consisting of plane vanilla options with different strikes and maturities. The author considers the simple market consisting of the bond and the base instrument -- a stock. The dynamics of the bond prices is given by a constant risk-free rate, while under the equivalent martingale measure \(Q\) the dynamics of the stock is described by the stochastic volatility model based on two correlated Wiener processes. The broad class of such markets contains, as special cases, the Heston and Black-Scholes models. The goal is to provide a static super-hedging strategy which will be only marginally more expensive than the barrier option itself and will be robust against model parameter uncertainty. The mathematical techniques used to prove appropriate existence, duality and convergence results range from financial mathematics, stochastic and semi-infinite optimization, convex analysis, stochastic and partial differential equations to semidefinite programming. Moreover, the author develops the whole ``numerical toolbox which enables to construct the strategy in the real time.

Recommendations

• Robust Static Super-Replication of Barrier Options in the Black-Scholes model
• Static replication of barrier-type options via integral equations
• Robust static hedging of barrier options in stochastic volatility models
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• OPTIMAL STATIC–DYNAMIC HEDGES FOR BARRIER OPTIONS
• Robust hedging of double touch barrier options
• Barrier options and their static hedges: simple derivations and extensions
• Duality in static hedging of barrier options

Cited in

(13)

• Robust static hedging of barrier options in stochastic volatility models
• Recent contributions to linear semi-infinite optimization
• Recent contributions to linear semi-infinite optimization: an update
• Comments on: Stability in linear optimization and related topics. A personal tour
• Robust estimation of superhedging prices
• Robust Static Super-Replication of Barrier Options in the Black-Scholes model
• Duality in static hedging of barrier options
• On an optimization problem related to static super-replicating strategies
• Robust pricing and hedging of double no-touch options
• Super-replication on illiquid markets -- semistatic approach
• Static replication of barrier-type options via integral equations
• Semi-robust replication of barrier-style claims on price and volatility
• Static super-replicating strategies for a class of exotic options

Describes a project that uses

Uses Software

• SeDuMi
• SDPT3
• PLCP

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