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

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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. (C) 2015 Wiley Periodicals, Inc.
Publisher
WILEY-BLACKWELL
Issue Date
2016-09
Language
English
Article Type
Article
Keywords

BARRIER OPTIONS; BROWNIAN EXCURSIONS; RUIN PROBABILITY

Citation

JOURNAL OF FUTURES MARKETS, v.36, no.9, pp.819 - 850

ISSN
0270-7314
DOI
10.1002/fut.21757
URI
http://hdl.handle.net/10203/213796
Appears in Collection
IE-Journal Papers(저널논문)
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