Static Hedging of Timing Risk

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...

Full description

Saved in:
Bibliographic Details
Published in:The Journal of derivatives 1999-04, Vol.6 (3), p.57-70
Main Authors: Carr, Peter, Picron, Jean-Francois
Format: Article
Language:English
Subjects:
Hedging
Options markets
Portfolio management
Risk assessment
Securities analysis
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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. How these results can be used to price any barrier option is shown.
ISSN:1074-1240
2168-8524
DOI:10.3905/jod.1999.319119