Interest rate option hedging portfolios without bank account

Alberto Bueno-Guerrero

Studies in Economics and Finance, 2019, vol. 37, issue 1, 134-142

Abstract: Purpose - This paper aims to study the conditions for the hedging portfolio of any contingent claim on bonds to have no bank account part. Design/methodology/approach - Hedging and Malliavin calculus techniques recently developed under a stochastic string framework are applied. Findings - A necessary and sufficient condition for the hedging portfolio to have no bank account part is found. This condition is applied to a barrier option, and an example of a contingent claim whose hedging portfolio has a bank account part different from zero is provided. Originality/value - To the best of the authors’ knowledge, this is the first time that this issue has been addressed in the literature.

Keywords: Barrier option; Hedging portfolio; Malliavin calculus; Stochastic string (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-02-2019-0058

DOI: 10.1108/SEF-02-2019-0058

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