Static Hedging of Multivariate Derivatives by Simulation

Paolo Pellizzari

Finance from University Library of Munich, Germany

Abstract: We propose an approximate static hedging procedure for multivariate derivatives. The hedging portfolio is composed of statically held simple univariate options, optimally weighted minimizing the variance of the difference between the target claim and the approximate replicating portfolio. The method uses simulated paths to estimate the weights of the hedging portfolio and is related to Monte Carlo control variates techniques. We report numerical results showing the performance of this static hedging procedure on bivariate options on the maximum of two assets and on 2- and 7-dimensional portfolio options. It is shown that, in the presence of transaction costs, Value at Risk and Expected Shortfall of the dynamically hedged positions can be higher than the ones obtained by a static hedge.

Keywords: Monte Carlo methods; option pricing; static and dynamic hedging (search for similar items in EconPapers)
JEL-codes: C15 G12 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2003-11-28, Revised 2003-12-04
New Economics Papers: this item is included in nep-cfn, nep-cmp, nep-fin and nep-rmg
Note: Type of Document - pdf; prepared on Latex on Mac; to print on Laser; pages: 23; figures: included
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Related works:
Journal Article: Static hedging of multivariate derivatives by simulation (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0311013

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