Rebalancing Static Super-Replications (Forthcoming in International Journal of Financial Engineering)

Akihiko Takahashi and Yukihiro Tsuzuki
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Akihiko Takahashi: Graduate School of Economics, University of Tokyo
Yukihiro Tsuzuki: Graduate School of Economics, University of Tokyo

No CARF-F-384, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper proposes a trading strategy that dynamically rebalances static super-replicating portfolios, which is very useful for both investment and hedging strategies. In order to investigate general properties of the strategy, we derive the Doob-Meyer decomposition for the value process without any specications of models under the continuous processes of the underlying variables. In particular, we find that the increasing part of the decomposition characterizes the performance of the strategy. Also, we obtain more concrete features for cross-currency and one-touch options based on our general framework. Moreover, numerical examples for cross-currency options demonstrate the effectiveness of our strategy for investment and hedging.

Pages: 19 pages
Date: 2016-04
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