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A recursive method for static replication of autocallable structured products

Kyoung-Kuk Kim and Dong-Young Lim

Quantitative Finance, 2019, vol. 19, issue 4, 647-661

Abstract: This paper discusses the problem of valuation and risk management of structured products, which have been popular in recent financial markets. We propose a recursive method based on static replication for a variety of structured products, and, in particular, focus on products with autocallable and barrier features under a general Markovian diffusion with killing. The core idea of the proposed algorithm is to recursively utilize the strike-spread approach and calendar-spread approach in the literature. To increase computational and practical feasibilities, we devise discrete static hedges and their convergence is analysed. Numerical experiments are conducted to confirm the effectiveness of our proposal and to show its highly accurate pricing and hedging performance.

Date: 2019
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Handle: RePEc:taf:quantf:v:19:y:2019:i:4:p:647-661