Optimal Weak Static Hedging of Equity and Credit Risk Using Derivatives

Dirk Becherer and Ian Ward

Applied Mathematical Finance, 2010, vol. 17, issue 1, 1-28

Abstract: We develop a generic method for constructing a weak static minimum variance hedge for a wide range of derivatives that may involve optimal exercise features or contingent cash flow streams to provide a hedge along a sequence of future hedging dates. The optimal hedge is constructed using a portfolio of pre-selected hedge instruments, which could be derivatives with different maturities. The hedge portfolio is weakly static in that it is initiated at time zero, does not involve intermediate re-balancing, but hedges may be gradually unwound over time. We study the static hedging of a convertible bond to demonstrate the method by an example that involves equity and credit risk. We investigate the robustness of the hedge performance with respect to parameter and model risk by numerical experiments.

Keywords: Static hedging; minimum variance hedging; displaced diffusion; stochastic volatility; calibration; convertible bond (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/13504860903075522 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apmtfi:v:17:y:2010:i:1:p:1-28

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAMF20

DOI: 10.1080/13504860903075522

Access Statistics for this article

Applied Mathematical Finance is currently edited by Professor Ben Hambly and Christoph Reisinger

More articles in Applied Mathematical Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().