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A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models ( Revised in June 2008, Published in "Journal of Futures Markets", Vol.29-5, 397-413, 2009. )

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  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Akira Yamazaki

    (Mizuho-DL Financial Technology Co., Ltd.)

Abstract

This paper proposes a new scheme for static hedging of European path-independent derivatives under stochastic volatility models. First, we show that pricing European path-independent derivatives under stochastic volatility models is transformed to pricing those under one-factor local volatility models. Next, applying an efficient static replication method for one-dimensional price processes developed by Takahashi and Yamazaki[2007], we present a static hedging scheme for European path-independent derivatives. Finally, a numerical example comparing our method with a dynamic hedging method under the Heston[1993]?s stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice.

Suggested Citation

  • Akihiko Takahashi & Akira Yamazaki, 2008. "A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models ( Revised in June 2008, Published in "Journal of Futures Markets", Vol.29-5, 397-413, 2009. )," CARF F-Series CARF-F-120, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf120
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/124.pdf
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    References listed on IDEAS

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