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A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models

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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 static hedging of European path-independent derivatives under stochastic volatility models. First, we show that pricing European path-independent derivatives under stochastic volatility models is transformed to pricing those under one-factor local volatility models. Next, applying an efficient static replication method for one-dimensional price processes developed by Takahashi and Yamazaki [2007], we present a static hedging scheme for European path-independent derivatives. Finally, a numerical example comparing our method with a dynamic hedging method under the Heston [1993]'s stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice.

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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-546.

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    Length: 13 pages
    Date of creation: Mar 2008
    Date of revision:
    Handle: RePEc:tky:fseres:2008cf546

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