Static hedging under maturity mismatch

DOI10.1007/S00780-014-0254-7MaRDI QIDQ2516768zbMATH OpenOpenAlexFDO

Authors Philipp A. Mayer, N. Packham, Wolfgang M. Schmidt

Publication date 4 August 2015

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00780-014-0254-7

zbMATH Keywords

additive processesEuropean optionsGaussian quadratureLévy processesnumerical integrationstatic hedgingTichonov regularisation

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

The problem of statically hedging European options of shorter maturity by using longer maturity vanilla options is studied in this paper. This question is important, e.g., when analysing options on forwards in relation to liquid options on the underlying spot, the price of which is modelled as an exponential additive process under a risk-neutral measure. Fourier transform techniques are the key to solving the hedging problem. Under mild smoothness and integrability assumptions on the payoff function \(p\), the authors show the existence of feasible hedging strategies involving European calls that converge (in \(L^1\) and almost surely) to the payoff \(p\). Practically important questions of using only finitely many hedging instruments and dealing with cases when the payoff function \(p\) does not satisfy the needed integrability conditions are discussed next. Here, the authors rely on Tichonov regularisation and numerical integration via Gaussian quadrature. Finally, the obtained results are extensively illustrated on the standard Black-Scholes-Merton (BSM), Carr-Geman-Madan-Yor (CGMY) and Heston asset price process models. Parameter choices, the quality of the obtained hedges, and differences between static and dynamic hedging are explained.

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Cited in

(9)

• Static hedging of multivariate derivatives by simulation
• Optimal static quadratic hedging
• A Stieltjes approach to static hedges
• Convergence analysis and optimal strike choice for static hedges of general path-independent pay-offs
• A functional analysis approach to the static replication of European options
• Static hedging under time-homogeneous diffusions
• Static and semistatic hedging as contrarian or conformist bets
• Hedging at-the-money digital options near maturity
• A remark on static hedging of options written on the last exit time

Describes a project that uses

Uses Software

• Regularization tools
• UTV

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