Implementing Static Hedges for Reverse Barrier Options: Under the Consideration of Market Frictions

Stolte, Johannes

ISBN 10: 3844311149 / ISBN 13: 9783844311143

Published by LAP LAMBERT Academic Publishing, 2011

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Seller Inventory # ERICA80038443111496

Bibliographic Details

• Title: Implementing Static Hedges for Reverse Barrier Options: Under the Consideration of Market Frictions
• Publisher: LAP LAMBERT Academic Publishing
• Publication Date: 2011
• Language: English
• ISBN 10: 3844311149
• ISBN 13: 9783844311143
• Binding: paperback
• Condition: Like New
• Book Type: book

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Synopsis

Barrier options are the most actively traded type of exotic equity derivative today. Especially reverse barrier options, like the up-and-out call considered here, are extremely difficult to hedge however. A number of interesting and sophisticated approaches of static hedging have therefore been proposed in the literature. To implement any of these static hedges under the consideration of observed market frictions many adjustments need to be addressed. This paper discusses the necessary adjustments for a large number of static hedges. As an example, DAX index options that are traded on the EUREX will be considered. In addition, hedge performance is analyzed with regard to a discounted hedge error. It turns out that only a few of the proposed static hedges perform satisfactory for an up-and-out call option with a barrier at 120%. It further seems unrealistic to hedge many different volatility levels or jump components in practice, as is proposed by some recent studies.

About the Author

Johannes Stolte, MSc, CQF: Studied Econometrics and Operations Research at Maastricht University to Masters Level. He worked on various quant desks, which helped to obtain a good working knowledge of exotic options and the various pricing techniques. Currently a PhD Candidate in Mathematical Finance at Imperial College London.