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Rebalancing Static Super-Replications (Forthcoming in International Journal of Financial Engineering)

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  • Akihiko Takahashi

    (Graduate School of Economics, University of Tokyo)

  • Yukihiro Tsuzuki

    (Graduate School of Economics, University of Tokyo)

Abstract

This paper proposes a trading strategy that dynamically rebalances static super-replicating portfolios, which is very useful for both investment and hedging strategies. In order to investigate general properties of the strategy, we derive the Doob-Meyer decomposition for the value process without any specications of models under the continuous processes of the underlying variables. In particular, we find that the increasing part of the decomposition characterizes the performance of the strategy. Also, we obtain more concrete features for cross-currency and one-touch options based on our general framework. Moreover, numerical examples for cross-currency options demonstrate the effectiveness of our strategy for investment and hedging.

Suggested Citation

  • Akihiko Takahashi & Yukihiro Tsuzuki, 2016. "Rebalancing Static Super-Replications (Forthcoming in International Journal of Financial Engineering)," CARF F-Series CARF-F-384, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf384
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    File URL: https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F384.pdf
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    References listed on IDEAS

    as
    1. Chung, San-Lin & Wang, Yaw-Huei, 2008. "Bounds and prices of currency cross-rate options," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 631-642, May.
    2. Haydyn Brown & David Hobson & L. C. G. Rogers, 2001. "Robust Hedging of Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 11(3), pages 285-314, July.
    3. Margrabe, William, 1978. "The Value of an Option to Exchange One Asset for Another," Journal of Finance, American Finance Association, vol. 33(1), pages 177-186, March.
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