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Robust hedging of the lookback option

Author

Listed:
  • David G. Hobson

    () (School of Mathematical Sciences, University of Bath, Claverton Down, Bath, BA2 7AY, UK Manuscript)

Abstract

The aim of this article is to find bounds on the prices of exotic derivatives, and in particular the lookback option, in terms of the (market) prices of call options. This is achieved without making explicit assumptions about the dynamics of the price process of the underlying asset, but rather by inferring information about the potential distribution of asset prices from the call prices. Thus the bounds we obtain and the associated hedging strategies are model independent. The appeal and significance of the hedging strategies arises from their universality and robustness to model mis-specification.

Suggested Citation

  • David G. Hobson, 1998. "Robust hedging of the lookback option," Finance and Stochastics, Springer, vol. 2(4), pages 329-347.
  • Handle: RePEc:spr:finsto:v:2:y:1998:i:4:p:329-347
    Note: received: August 1996; final version received: August 1997
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    More about this item

    Keywords

    Lookback option; super-replication; martingale; barycentre;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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