Pricing and hedging American and hybrid strangles with finite maturity

Souleymane Laminou Abdou and Franck Moraux ()

Journal of Banking & Finance, 2016, vol. 62, issue C, 112-125

Abstract: This paper introduces variants of strangles, called Euro-American or hybrid strangles, and it promotes a new numerical pricing technique. We highlight and compare the properties of European, American, and hybrid strangles with pricing and hedging in mind. The new quadrature approach we propose can account for systems of coupled integral equations that locate the early exercise boundaries of finite-lived contracts. We show that this method is efficient, accurate, and fast for pricing all types of early exercisable strangles. Other advantages of this technique are that it avoids the non-monotonic gradient problem faced by others and it allows users to control for errors. We then investigate the hedging of all strangles, we derive analytical expressions for some Greek parameters, and we stress how these parameters can differ (or not) from each other.

Keywords: G12; G13; C61; C65; American strangles; Early exercise boundaries; Kim representation; Numerical integration; Greek parameters (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426615002800
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Pricing and hedging American and hybrid strangles with finite maturity (2016)
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:eee:jbfina:v:62:y:2016:i:c:p:112-125

DOI: 10.1016/j.jbankfin.2015.10.003

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().