Static Hedging Under Maturity Mismatch
28 Pages Posted: 14 Dec 2011 Last revised: 4 Nov 2013
Date Written: November 4, 2013
Can shorter maturity European options be statically hedged with longer maturity plain vanilla options? This problem appears for example when analyzing options on forwards in relation to liquid options on the spot underlying. Under mild assumptions on the underlying security price process and on the option's payoff function we show that approximate static hedges exist und we provide a recipe for constructing them. Examples illustrate the power of the hedge and its sensitivity to modelling assumptions. The results can be extended to formulating semi-static hedging strategies for discretely monitored path-dependent contingent claims.
Keywords: static hedging, Levy processes, additive processes
JEL Classification: C02, G13
Suggested Citation: Suggested Citation