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Hedging Derivatives on Two Assets with Model Risk

Author

Listed:
  • Koichi Matsumoto

    (Kyushu University)

  • Keita Shimizu

    (Kyushu University)

Abstract

This paper studies a static hedging problem of derivatives when the model risk exists. When the payoff of derivative depends on one asset, Matsumoto (Int J Financ Eng 4(4):1750042, 2017b) solves the problem. We extend his result to derivatives on two assets. Though the optimal solution is more complicated, we show that the problem can be solved numerically in an algebraic way. Further we give some simple numerical examples to show our method works well.

Suggested Citation

  • Koichi Matsumoto & Keita Shimizu, 2020. "Hedging Derivatives on Two Assets with Model Risk," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(1), pages 83-95, March.
    • Handle: RePEc:kap:apfinm:v:27:y:2020:i:1:d:10.1007_s10690-019-09283-3
    DOI: 10.1007/s10690-019-09283-3
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    References listed on IDEAS

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    3. Koichi Matsumoto, 2009. "Mean-Variance Hedging with Uncertain Trade Execution," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(3), pages 219-252.
    4. R. Tevzadze & T. Uzunashvili, 2012. "Robust Mean-Variance Hedging And Pricing Of Contingent Claims In A One Period Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-9.
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    7. Dimitris Bertsimas & Leonid Kogan & Andrew W. Lo, 2001. "Hedging Derivative Securities and Incomplete Markets: An (epsilon)-Arbitrage Approach," Operations Research, INFORMS, vol. 49(3), pages 372-397, June.
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    More about this item

    Keywords

    Hedging; Derivatives; Model risk;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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