Static Hedging of Multivariate Derivatives by Simulation
AbstractWe 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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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0311013.
Length: 23 pages
Date of creation: 28 Nov 2003
Date of revision: 04 Dec 2003
Note: Type of Document - pdf; prepared on Latex on Mac; to print on Laser; pages: 23; figures: included
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Monte Carlo methods; option pricing; static and dynamic hedging;
Other versions of this item:
- Pellizzari, P., 2005. "Static hedging of multivariate derivatives by simulation," European Journal of Operational Research, Elsevier, vol. 166(2), pages 507-519, October.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-30 (All new papers)
- NEP-CFN-2003-11-30 (Corporate Finance)
- NEP-CMP-2003-11-30 (Computational Economics)
- NEP-FIN-2003-11-30 (Finance)
- NEP-RMG-2003-11-30 (Risk Management)
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