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Risk Analysis and Hedging of Parisian Options under a Jump‐Diffusion Model

Kyoung‐Kuk Kim and Dong‐Young Lim

Journal of Futures Markets, 2016, vol. 36, issue 9, 819-850

Abstract: A Parisian option is a variant of a barrier option such that its payment is activated or deactivated only if the underlying asset remains above or below a barrier over a certain amount of time. We show that its complex payoff feature can cause dynamic hedging to fail. As an alternative, we investigate a quasi‐static hedge of Parisian options under a more general jump‐diffusion process. Specifically, we propose a strategy of decomposing a Parisian option into the sum of other contingent claims which are statically hedged. Through numerical experiments, we show the effectiveness of the suggested hedging strategy. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:819–850, 2016

Date: 2016
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Handle: RePEc:wly:jfutmk:v:36:y:2016:i:9:p:819-850