Efficient Static Replication of European Options under Exponential Levy 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-539, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper proposes a new scheme for the static replication of European options and their portfolios. First, we derive a general approximation formula for efficient static replication as an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Second, we present a concrete procedure for implementing our scheme by applying it to plain vanilla options under exponential Levy models. Finally, numerical examples in a model developed by Carr, Geman, Madan and Yor [2002] are used to demonstrate that our replication scheme is more efficient and more effective in practice than a standard static replication method.

Pages: 18 pages
Date: 2008-01
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Citations: View citations in EconPapers (1)

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