A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models
AbstractThis 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, 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's stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-567.
Length: 22 pages
Date of creation: Jun 2008
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-21 (All new papers)
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- Peter Carr & Katrina Ellis & Vishal Gupta, 1998. "Static Hedging of Exotic Options," Journal of Finance, American Finance Association, vol. 53(3), pages 1165-1190, 06.
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