Efficient Static Replication of European Options for Exponential Levy Models (Revised in January 2008, Published in "Journal of Futures Markets", Vol.29-1, 1-15, 2009. )

Akihiko Takahashi and Akira Yamazaki
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Akihiko Takahashi: Faculty of Economics, University of Tokyo
Akira Yamazaki: Mizuho-DL Financial Technology Co., Ltd.

No CARF-F-105, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a new scheme for the static replication of European options and their portfolios. First, we derive a general approximation formula for efficient static replication as an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Second, we present a concrete procedure for implementing our scheme by applying it to plain vanilla options under exponential L?evy models. Finally, numerical examples in a model developed by Carr, Geman, Madan and Yor[2002] are used to demonstrate that our replication scheme is more efficient and more effective in practice than a standard static replication method.

Pages: 30 pages
Date: 2007-09
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Citations: View citations in EconPapers (1)

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