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Interest rate option hedging portfolios without bank account

Author

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  • Alberto Bueno-Guerrero

Abstract

Purpose - This paper aims to study the conditions for the hedging portfolio of any contingent claim on bonds to have no bank account part. Design/methodology/approach - Hedging and Malliavin calculus techniques recently developed under a stochastic string framework are applied. Findings - A necessary and sufficient condition for the hedging portfolio to have no bank account part is found. This condition is applied to a barrier option, and an example of a contingent claim whose hedging portfolio has a bank account part different from zero is provided. Originality/value - To the best of the authors’ knowledge, this is the first time that this issue has been addressed in the literature.

Suggested Citation

  • Alberto Bueno-Guerrero, 2019. "Interest rate option hedging portfolios without bank account," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 37(1), pages 134-142, September.
    • Handle: RePEc:eme:sefpps:sef-02-2019-0058
    DOI: 10.1108/SEF-02-2019-0058
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