A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models

Journal of Futures Markets, Vol. 29, No. 5, 2009

Posted: 23 Apr 2011

See all articles by Akihiko Takahashi

Akihiko Takahashi

University of Tokyo - Faculty of Economics

Akira Yamazaki

Hosei University - Graduate School of Business Administration

Date Written: March 3, 2009

Abstract

This paper proposes a new scheme for static hedging of European path-independent derivatives under stochastic volatility models. First, we show that pricing European path-independent derivatives under stochastic volatility models is transformed to pricing those under one-factor local volatility models. Next, applying an efficient static replication method for one-dimensional price processes developed by Takahashi and Yamazaki (2007), we present a static hedging scheme for European path-independent derivatives. Finally, a numerical example comparing our method with a dynamic hedging method under the Heston (1993) stochastic volatility model is used to demonstrate that our hedging scheme is effective in practice.

Keywords: Static Hedging, Stochastic Volatility, Markovian Projection, Plain Vanilla Option, Heston Model

Suggested Citation

Takahashi, Akihiko and Yamazaki, Akira, A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models (March 3, 2009). Journal of Futures Markets, Vol. 29, No. 5, 2009, Available at SSRN: https://ssrn.com/abstract=1816440

Akihiko Takahashi

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

Akira Yamazaki (Contact Author)

Hosei University - Graduate School of Business Administration ( email )

Japan

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