A new scheme for static hedging of European derivatives under stochastic volatility models
✍ Scribed by Akihiko Takahashi; Akira Yamazaki
- Publisher
- John Wiley and Sons
- Year
- 2009
- Tongue
- English
- Weight
- 138 KB
- Volume
- 29
- Category
- Article
- ISSN
- 0270-7314
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✦ Synopsis
Abstract
This study 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 (2008), we present a static hedging scheme for European path‐independent derivatives. Finally, a numerical example comparing our method with a dynamic hedging method under Heston's (1993) stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:397–413, 2009