Multi-period static hedging of European options
Fuente:
arXiv
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| Autori principali: | , , |
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| Natura: | Preprint |
| Pubblicazione: |
2023
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| _version_ | 1866915453246373888 |
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| author | Banerjee, Purba Iyer, Srikanth Jain, Shashi |
| author_facet | Banerjee, Purba Iyer, Srikanth Jain, Shashi |
| contents | We consider the hedging of European options when the price of the underlying asset follows a single-factor Markovian framework. By working in such a setting, Carr and Wu \cite{carr2014static} derived a spanning relation between a given option and a continuum of shorter-term options written on the same asset. In this paper, we have extended their approach to simultaneously include options over multiple short maturities. We then show a practical implementation of this with a finite set of shorter-term options to determine the hedging error using a Gaussian Quadrature method. We perform a wide range of experiments for both the \textit{Black-Scholes} and \textit{Merton Jump Diffusion} models, illustrating the comparative performance of the two methods. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2310_01104 |
| institution | arXiv |
| publishDate | 2023 |
| record_format | arxiv |
| spellingShingle | Multi-period static hedging of European options Banerjee, Purba Iyer, Srikanth Jain, Shashi Mathematical Finance Econometrics Probability Statistics Theory We consider the hedging of European options when the price of the underlying asset follows a single-factor Markovian framework. By working in such a setting, Carr and Wu \cite{carr2014static} derived a spanning relation between a given option and a continuum of shorter-term options written on the same asset. In this paper, we have extended their approach to simultaneously include options over multiple short maturities. We then show a practical implementation of this with a finite set of shorter-term options to determine the hedging error using a Gaussian Quadrature method. We perform a wide range of experiments for both the \textit{Black-Scholes} and \textit{Merton Jump Diffusion} models, illustrating the comparative performance of the two methods. |
| title | Multi-period static hedging of European options |
| topic | Mathematical Finance Econometrics Probability Statistics Theory |
| url | https://arxiv.org/abs/2310.01104 |