Topic
Replicating strategy
About: Replicating strategy is a research topic. Over the lifetime, 39 publications have been published within this topic receiving 1477 citations.
Papers
TL;DR: In this paper, a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision was developed, which permits calculation of the transactions costs of option replication and provides bounds on option prices.
Abstract: Transactions costs invalidate the Black-Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black-Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision. Hedging errors are uncorrelated with the market and approach zero with more frequent revision. The technique permits calculation of the transactions costs of option replication and provides bounds on option prices.
865 citations
TL;DR: In this article, the authors give two explicit formulae for the hedging portfolio of Asian options, one based on the usual Lognormal approximation, and the other based on an Inverse Gaussian approximation.
Abstract: We give 2 explicit formulae for the hedging portfolio of Asian options. One is based on the usual Lognormal approximation, and the other on an Inverse Gaussian approximation. Both give excellent results as replicating strategies when the parameters of the model are in a reasonable range.
43 citations
Journal Article•
TL;DR: In this paper, a lower and upper bound for the price of Asian options is proposed, which combines a lower bound and an upper bound into a new analytical approximation, which turns out to be very accurate and moreover has the correct first and second moment.
Abstract: For discrete arithmetic Asian options the payoff depends on the price average of the underlying asset. Due to the dependence structure between the prices of the underlying asset, no simple exact pricing formula exists, not even in a Black-Scholes setting. In the recent literature, several approximations and bounds for the price of this type of option are proposed. One of these approximations consists of replacing the distribution of the stochastic price average by an ad hoc distribution (e.g. Lognormal or Inverse Gaussian) with the same first and second moment. In this paper we use a different approach and combine a lower and upper bound into a new analytical approximation. This approximation can be calculated efficiently, turns out to be very accurate and moreover, it has the correct first and second moment. Since the approximation is analytical, we can also calculate the corresponding hedging Greeks and construct a replicating strategy.
35 citations
Posted Content•
TL;DR: In this paper, the authors investigated the relationship between asymptotic completeness in the global market and completeness of the finite submarkets, under a no-arbitrage assumption.
Abstract: We study completeness in large financial markets, namely markets containing countably many assets. We investigate the relationship between asymptotic completeness in the global market and completeness in the finite submarkets, under a no-arbitrage assumption. We also suggest a way to approximate a replicating strategy in the large market by finite-dimensional portfolios. Furthermore, we find necessary and sufficient conditions for completeness to hold in a factor model.
30 citations
TL;DR: In this article, the authors investigated the relationship between asymptotic completeness in the global market and completeness of the finite submarkets, under a no-arbitrage assumption.
Abstract: We study completeness in large financial markets, namely markets containing countably many assets. We investigate the relationship between asymptotic completeness in the global market and completeness in the finite submarkets, under a no-arbitrage assumption. We also suggest a way to approximate a replicating strategy in the large market by finite-dimensional portfolios. Furthermore, we find necessary and sufficient conditions for completeness to hold in a factor model.
27 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2021 | 2 |
| 2020 | 1 |
| 2019 | 1 |
| 2018 | 2 |
| 2015 | 1 |
| 2014 | 1 |