Static hedging of timing risk

Peter Carr, Jean Francois Picron

Research output: Contribution to journalArticle

Abstract

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. The authors show how these results can be used to price any barrier option.

Original languageEnglish (US)
Pages (from-to)57-70
Number of pages14
JournalJournal of Derivatives
Volume6
Issue number3
DOIs
StatePublished - Mar 1 1999

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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