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Efficient Static Replication of European Options under Exponential Levy Models

Author

Listed:
  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Akira Yamazaki

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

Abstract

This paper proposes a new scheme for the static replication of European options and their portfolios. First, we derive a general approximation formula for efficient static replication as an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Second, we present a concrete procedure for implementing our scheme by applying it to plain vanilla options under exponential Levy models. Finally, numerical examples in a model developed by Carr, Geman, Madan and Yor [2002] are used to demonstrate that our replication scheme is more efficient and more effective in practice than a standard static replication method.

Suggested Citation

  • Akihiko Takahashi & Akira Yamazaki, 2008. "Efficient Static Replication of European Options under Exponential Levy Models," CIRJE F-Series CIRJE-F-539, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf539
    as

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf539.pdf
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    References listed on IDEAS

    as
    1. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
    2. repec:bla:jfinan:v:53:y:1998:i:3:p:1165-1190 is not listed on IDEAS
    3. S. G. Kou, 2002. "A Jump-Diffusion Model for Option Pricing," Management Science, INFORMS, vol. 48(8), pages 1086-1101, August.
    4. repec:bla:jfinan:v:58:y:2003:i:2:p:753-778 is not listed on IDEAS
    5. Peter Carr & Liuren Wu, 2003. "The Finite Moment Log Stable Process and Option Pricing," Journal of Finance, American Finance Association, vol. 58(2), pages 753-777, April.
    6. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    7. Eberlein, Ernst & Keller, Ulrich & Prause, Karsten, 1998. "New Insights into Smile, Mispricing, and Value at Risk: The Hyperbolic Model," The Journal of Business, University of Chicago Press, vol. 71(3), pages 371-405, July.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Federico De Olivera & Ernesto Mordecki, 2014. "Computing Greeks for L\'evy Models: The Fourier Transform Approach," Papers 1407.1343, arXiv.org.

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