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Static Hedging of Barrier Options under General Asset Dynamics: Unification and Application

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  • Morten Nalholm

    (Department of Applied Mathematics and Statistics, Institute for Mathematical Sciences, University of Copenhagen)

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    Abstract

    A new method for static hedging of barrier options under general asset dynamics is introduced. The method unifies previous approaches and nests their extensions. Using a finite set of hedge instruments the method is directly implementable and it is shown how to operationalize the hedge in a jump-diffusion model with correlated stochastic volatility. The performance of the hedge is thoroughly studied and generic sources of hedge errors are addressed.

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    Bibliographic Info

    Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2005/08.

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    Length: 30 pages
    Date of creation: Nov 2005
    Date of revision:
    Handle: RePEc:kud:kuiefr:200508

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