A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models

Akihiko Takahashi and Akira Yamazaki
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Akihiko Takahashi: Faculty of Economics, University of Tokyo
Akira Yamazaki: Mizuho-DL Financial Technology Co., Ltd.

No CIRJE-F-546, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper proposes a new scheme for static hedging of European path-independent derivatives under stochastic volatility models. First, we show that pricing European path-independent derivatives under stochastic volatility models is transformed to pricing those under one-factor local volatility models. Next, applying an efficient static replication method for one-dimensional price processes developed by Takahashi and Yamazaki [2007], we present a static hedging scheme for European path-independent derivatives. Finally, a numerical example comparing our method with a dynamic hedging method under the Heston [1993]'s stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice.

Pages: 13 pages
Date: 2008-03
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2008cf546

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