Title: A New Scheme for Static Hedging of European Derivatives under Stochastic Volatility Models
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.
Publication Year: 2009
Publication Date: 2009-03-03
Language: en
Type: article
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Cited By Count: 2
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