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A new scheme for static hedging of European derivatives under stochastic volatility models

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  • Akihiko Takahashi
  • Akira Yamazaki

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

Suggested Citation

  • Akihiko Takahashi & Akira Yamazaki, 2009. "A new scheme for static hedging of European derivatives under stochastic volatility models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(5), pages 397-413, May.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:5:p:397-413
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    Cited by:

    1. Jingtang Ma & Dongya Deng & Harry Zheng, 2016. "Convergence analysis and optimal strike choice for static hedges of general path-independent pay-offs," Quantitative Finance, Taylor & Francis Journals, vol. 16(4), pages 593-603, April.
    2. Vikranth Lokeshwar Dhandapani & Shashi Jain, 2023. "Data-driven Approach for Static Hedging of Exchange Traded Options," Papers 2302.00728, arXiv.org, revised Jan 2024.
    3. Akira Yamazaki, 2022. "Recovering subjective probability distributions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1234-1263, July.
    4. San‐Lin Chung & Yi‐Ta Huang & Pai‐Ta Shih & Jr‐Yan Wang, 2019. "Semistatic hedging and pricing American floating strike lookback options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(4), pages 418-434, April.

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