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Rebalancing Static Super-Replications

Author

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  • Akihiko Takahashi

    (Faculty of Economics, The University of Tokyo)

  • Yukihiro Tsuzuki

    (Graduate School of Economics, The 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 speci cations of models under the continuous processes of the underlying variables. In particular, we nd that the in- creasing 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, nu- merical 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," CIRJE F-Series CIRJE-F-1008, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2016cf1008
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2016/2016cf1008.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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