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Semi-Static Hedging Of Barrier Options Under Poisson Jumps

Author

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  • PETER CARR

    (NYU Courant Institute, 251 Mercer Street, New York, NY 10012, USA)

Abstract

We show that the payoff to barrier options can be replicated when the underlying price process is driven by the difference of two independent Poisson processes. The replicating strategy employs simple semi-static positions in co-terminal standard options. We note that classical dynamic replication using just the underlying asset and a riskless asset is not possible in this context. When the underlying of the barrier option has no carrying cost, we show that the same semi-static trading strategy continues to replicate even when the two jump arrival rates are generalized into positive even functions of distance to the barrier and when the clock speed is randomized into a positive continuous independent process. Since the even function and the positive process need no further specification, our replicating strategies are also semi-robust. Finally, we show that previous results obtained for continuous processes arise as limits of our analysis.

Suggested Citation

  • Peter Carr, 2011. "Semi-Static Hedging Of Barrier Options Under Poisson Jumps," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(07), pages 1091-1111.
    • Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:07:n:s0219024911006668
    DOI: 10.1142/S0219024911006668
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    Citations

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    Cited by:

    1. Hongzhong Zhang, 2018. "Stochastic Drawdowns," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10078, August.
    2. Lee, Hangsuck & Choi, Yang Ho & Lee, Gaeun, 2022. "Multi-step barrier products and static hedging," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    3. Paolo Di Tella & Martin Haubold & Martin Keller-Ressel, 2017. "Semi-Static Variance-Optimal Hedging in Stochastic Volatility Models with Fourier Representation," Papers 1709.05527, arXiv.org.
    4. Paolo Di Tella & Martin Haubold & Martin Keller-Ressel, 2017. "Semi-Static and Sparse Variance-Optimal Hedging," Papers 1709.05519, arXiv.org.

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