IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Static replications with traffic light options

Listed author(s):
  • Michael Schmutz
  • Thomas Z\"urcher
Registered author(s):

    It is well known that any sufficiently regular one-dimensional payoff function has an explicit static hedge by bonds, forward contracts and lots of vanilla options. We show that the natural extension of the corresponding representation leads to a static hedge based on the same instruments along with traffic light options, which have recently been introduced in the market. One big advantage of these replication strategies is the easy structure of the hedge. Hence, traffic light options are particularly powerful building blocks for more complicated bivariate options. While it is well known that the second strike derivative of non-discounted prices of vanilla options are related to the risk-neutral density of the underlying asset price in the corresponding absolutely continuous settings, similar statements hold for traffic light options in sufficiently regular bivariate settings.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    File Function: Latest version
    Download Restriction: no

    Paper provided by in its series Papers with number 1011.4795.

    in new window

    Date of creation: Nov 2010
    Handle: RePEc:arx:papers:1011.4795
    Contact details of provider: Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:arx:papers:1011.4795. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.