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Rebalancing Static Super-Replications

Author

Listed:
  • Masaaki Fujii

    (Graduate School of Economics, University of Tokyo)

  • Yukihiro Tsuzuki

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

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 specifications 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

  • Masaaki Fujii & Yukihiro Tsuzuki, 2011. "Rebalancing Static Super-Replications," CIRJE F-Series CIRJE-F-796, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2011cf796
    as

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2011/2011cf796.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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