Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
9663689 | European Journal of Operational Research | 2005 | 13 Pages |
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.
Related Topics
Physical Sciences and Engineering
Computer Science
Computer Science (General)
Authors
P. Pellizzari,