Hedging Derivatives on Two Assets with Model Risk

Koichi Matsumoto () and Keita Shimizu
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Koichi Matsumoto: Kyushu University
Keita Shimizu: Kyushu University

Asia-Pacific Financial Markets, 2020, vol. 27, issue 1, No 4, 83-95

Abstract: Abstract This paper studies a static hedging problem of derivatives when the model risk exists. When the payoff of derivative depends on one asset, Matsumoto (Int J Financ Eng 4(4):1750042, 2017b) solves the problem. We extend his result to derivatives on two assets. Though the optimal solution is more complicated, we show that the problem can be solved numerically in an algebraic way. Further we give some simple numerical examples to show our method works well.

Keywords: Hedging; Derivatives; Model risk; 91G20; 91G60 (search for similar items in EconPapers)
JEL-codes: D81 G13 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10690-019-09283-3

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