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Static Hedging with Traffic Light Options

Michael Schmutz and Thomas Zürcher

Journal of Futures Markets, 2014, vol. 34, issue 7, 690-702

Abstract: It is well known that sufficiently regular, one‐dimensional payoff functions have an explicit static hedge by bonds, forward contracts, and options in a continuum of strikes. An easy and natural extension of the corresponding representation leads to static hedges based on the same instruments along with traffic light options, which have recently been introduced in the market. It is well known that the second strike derivative of non‐discounted prices of vanilla options is related to the risk‐neutral density of the underlying asset price in the corresponding absolutely continuous settings. Similar statements hold for traffic light options in sufficiently regular, bivariate settings. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:690–702, 2014

Date: 2014
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Handle: RePEc:wly:jfutmk:v:34:y:2014:i:7:p:690-702