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Risk Analysis and Hedging of Parisian Options under a Jump‐Diffusion Model

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  • Kyoung‐Kuk Kim
  • Dong‐Young Lim

Abstract

A Parisian option is a variant of a barrier option such that its payment is activated or deactivated only if the underlying asset remains above or below a barrier over a certain amount of time. We show that its complex payoff feature can cause dynamic hedging to fail. As an alternative, we investigate a quasi‐static hedge of Parisian options under a more general jump‐diffusion process. Specifically, we propose a strategy of decomposing a Parisian option into the sum of other contingent claims which are statically hedged. Through numerical experiments, we show the effectiveness of the suggested hedging strategy. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:819–850, 2016

Suggested Citation

  • Kyoung‐Kuk Kim & Dong‐Young Lim, 2016. "Risk Analysis and Hedging of Parisian Options under a Jump‐Diffusion Model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(9), pages 819-850, September.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:9:p:819-850
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    Cited by:

    1. Gongqiu Zhang & Lingfei Li, 2021. "A General Approach for Parisian Stopping Times under Markov Processes," Papers 2107.06605, arXiv.org.

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