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Static Hedging of Multivariate Derivatives by Simulation

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Author Info
Paolo Pellizzari (University of Venice)

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Abstract

We propose an approximate static hedging procedure for multivariate derivatives. The hedging portfolio is composed of statically held simple univariate options, optimally weighted minimizing the variance of the difference between the target claim and the approximate replicating portfolio. The method uses simulated paths to estimate the weights of the hedging portfolio and is related to Monte Carlo control variates techniques. We report numerical results showing the performance of this static hedging procedure on bivariate options on the maximum of two assets and on 2- and 7-dimensional portfolio options. It is shown that, in the presence of transaction costs, Value at Risk and Expected Shortfall of the dynamically hedged positions can be higher than the ones obtained by a static hedge.

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Publisher Info
Paper provided by EconWPA in its series Finance with number 0311013.

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Length: 23 pages
Date of creation: 28 Nov 2003
Date of revision: 04 Dec 2003
Handle: RePEc:wpa:wuwpfi:0311013

Note: Type of Document - pdf; prepared on Latex on Mac; to print on Laser; pages: 23; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: Monte Carlo methods; option pricing; static and dynamic hedging;

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Find related papers by JEL classification:
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hyungsok Ahn Adviti, Muni, Glen Swindle, 1997. "Misspecified asset price models and robust hedging strategies," Applied Mathematical Finance, Taylor and Francis Journals, vol. 4(1), pages 21-36, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Xia Su, 2006. "Hedging Basket Options by Using a Subset of Underlying Assets," Bonn Econ Discussion Papers bgse14_2006, University of Bonn, Germany. [Downloadable!]
  2. Johannes Siven & Rolf Poulsen, 2009. "Auto-static for the people: risk-minimizing hedges of barrier options," Review of Derivatives Research, Springer, vol. 12(3), pages 193-211, October. [Downloadable!] (restricted)
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