Static Hedging of Timing Risk

Posted: 30 Jun 1999

See all articles by Jean-Francois Picron

Jean-Francois Picron

Summit Systems, Inc.

Peter Carr

New York University Finance and Risk Engineering

Abstract

Many exotic options involve a payoff that occurs at the first time the stock price crosses a constant barrier. Although the amount to be paid is known, the time at which it is paid is not. This article shows how a static position in European options can be used to hedge against this timing risk. The simulation results show that this approach outperforms dynamic hedging with the underlying. The authors show how these results can be used to price any barrier option.

JEL Classification: G13

Suggested Citation

Picron, Jean-Francois and Carr, Peter P., Static Hedging of Timing Risk. Journal of Derivatives, Spring 1999. Available at SSRN: https://ssrn.com/abstract=151683

Jean-Francois Picron (Contact Author)

Summit Systems, Inc. ( email )

22 Cortlandt Street
New York, NY 10007
212-896-3549 (Phone)

Peter P. Carr

New York University Finance and Risk Engineering ( email )

6 MetroTech Center
Brooklyn, NY 11201
United States
9176217733 (Phone)

HOME PAGE: http://engineering.nyu.edu/people/peter-paul-carr

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