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Efficient Static Replication of European Options for Exponential Levy Models (Revised in January 2008, Published in "Journal of Futures Markets", Vol.29-1, 1-15, 2009. )

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Author Info

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Akira Yamazaki

    (Mizuho-DL Financial Technology Co., Ltd.)

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    Abstract

    This paper proposes a new scheme for the static replication of European options and their portfolios. First, we derive a general approximation formula for efficient static replication as an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Second, we present a concrete procedure for implementing our scheme by applying it to plain vanilla options under exponential L?evy models. Finally, numerical examples in a model developed by Carr, Geman, Madan and Yor[2002] are used to demonstrate that our replication scheme is more efficient and more effective in practice than a standard static replication method.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/107.pdf
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    Bibliographic Info

    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-105.

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    Length: 30 pages
    Date of creation: Sep 2007
    Date of revision:
    Handle: RePEc:cfi:fseres:cf105

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