Static hedging under maturity mismatch

Philipp Mayer (), Natalie Packham () and Wolfgang Schmidt ()

Finance and Stochastics, 2015, vol. 19, issue 3, 509-539

Abstract: Can shorter maturity European options be statically hedged with longer maturity plain vanilla options? This problem appears, for example, when analysing options on forwards in relation to liquid options on the spot underlying. Under mild assumptions on the underlying security price process and the option’s payoff function, we show that approximate static hedges exist and we provide a recipe for constructing them. Examples illustrate the power of the hedge and its sensitivity to modelling assumptions. The results can be extended to formulating semi-static hedging strategies for discretely monitored path-dependent contingent claims. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Static hedging; Lévy processes; Additive processes; 60G51; 91G20; C02; G13 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s00780-014-0254-7

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