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Static Hedging of Barrier Options under General Asset Dynamics: Unification and Application

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  • Morten Nalholm

    (Department of Applied Mathematics and Statistics, Institute for Mathematical Sciences, University of Copenhagen)

Abstract

A new method for static hedging of barrier options under general asset dynamics is introduced. The method unifies previous approaches and nests their extensions. Using a finite set of hedge instruments the method is directly implementable and it is shown how to operationalize the hedge in a jump-diffusion model with correlated stochastic volatility. The performance of the hedge is thoroughly studied and generic sources of hedge errors are addressed.

Suggested Citation

  • Morten Nalholm, 2005. "Static Hedging of Barrier Options under General Asset Dynamics: Unification and Application," FRU Working Papers 2005/08, University of Copenhagen. Department of Economics. Finance Research Unit.
    • Handle: RePEc:kud:kuiefr:200508
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