Static Hedging Under Maturity Mismatch

28 Pages Posted: 14 Dec 2011 Last revised: 4 Nov 2013

Philipp A. Mayer

Graz University of Technology

Natalie Packham

Berlin School of Economics and Law

Wolfgang M. Schmidt

Frankfurt School of Finance & Management

Date Written: November 4, 2013

Abstract

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

Mayer, Philipp A. and Packham, Natalie and Schmidt, Wolfgang M., Static Hedging Under Maturity Mismatch (November 4, 2013). Available at SSRN: https://ssrn.com/abstract=1971625 or http://dx.doi.org/10.2139/ssrn.1971625

Philipp A. Mayer

Graz University of Technology ( email )

Kopernikusgasse 24/IV
Graz University of Technology,
GRAZ, STYRIA A-8010
Austria

Natalie Packham (Contact Author)

Berlin School of Economics and Law ( email )

Badensche Strasse 50-51
Berlin, D-10825
Germany

HOME PAGE: http://www.packham.net

Wolfgang M. Schmidt

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

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