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Efficient Static Replication of European Options for Exponential Levy Models

Author

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  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

  • Akira Yamazaki

    (Mizuho-DL Financial Technology Co., Ltd.)

Abstract

This paper proposes a new method of static replication for European options and their portfolio. First a general approximation formula of efficient static replication is derived, which is based on and an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Then, the concrete procedure to implement our method with exponential Levy models is described by using examples such as plain vanilla, cash digital, asset digital and power options. Finally, numerical examples with the CGMY(Carr, Geman, Madan and Yor[2002]) model show that our replication scheme is efficient and effective in practice.

Suggested Citation

  • Akihiko Takahashi & Akira Yamazaki, 2007. "Efficient Static Replication of European Options for Exponential Levy Models," CIRJE F-Series CIRJE-F-513, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2007cf513
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    Cited by:

    1. Vikranth Lokeshwar Dhandapani & Shashi Jain, 2023. "Data-driven Approach for Static Hedging of Exchange Traded Options," Papers 2302.00728, arXiv.org, revised Jan 2024.

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