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Static hedging under maturity mismatch

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  • Philipp Mayer
  • Natalie Packham
  • Wolfgang Schmidt

Abstract

Can shorter maturity European options be statically hedged with longer maturity plain vanilla options? This problem appears, for example, when analysing options on forwards in relation to liquid options on the spot underlying. Under mild assumptions on the underlying security price process and the option’s payoff function, we show that approximate static hedges exist and we provide a recipe for constructing them. Examples illustrate the power of the hedge and its sensitivity to modelling assumptions. The results can be extended to formulating semi-static hedging strategies for discretely monitored path-dependent contingent claims. Copyright Springer-Verlag Berlin Heidelberg 2015

Suggested Citation

  • Philipp Mayer & Natalie Packham & Wolfgang Schmidt, 2015. "Static hedging under maturity mismatch," Finance and Stochastics, Springer, vol. 19(3), pages 509-539, July.
    • Handle: RePEc:spr:finsto:v:19:y:2015:i:3:p:509-539
    DOI: 10.1007/s00780-014-0254-7
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    References listed on IDEAS

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    Cited by:

    1. Augusto Blanc-Blocquel & Luis Ortiz-Gracia & Rodolfo Oviedo, 2023. "Hedging At-the-money Digital Options Near Maturity," Methodology and Computing in Applied Probability, Springer, vol. 25(1), pages 1-18, March.

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    More about this item

    Keywords

    Static hedging; Lévy processes; Additive processes; 60G51; 91G20; C02; G13;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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