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

Fingerprint

Hedge
Simulation
Static hedging
Exotic options
Stock prices
Barrier options
European options
Dynamic hedging

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Static hedging of timing risk. / Carr, Peter; Picron, Jean Francois.

In: Journal of Derivatives, Vol. 6, No. 3, 01.03.1999, p. 57-70.

Research output: Contribution to journalArticle

Carr, Peter ; Picron, Jean Francois. / Static hedging of timing risk. In: Journal of Derivatives. 1999 ; Vol. 6, No. 3. pp. 57-70.
@article{3f889a667a0547b6a4b2f5a2653c06a0,
title = "Static hedging of timing risk",
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.",
author = "Peter Carr and Picron, {Jean Francois}",
year = "1999",
month = "3",
day = "1",
doi = "10.3905/jod.1999.319119",
language = "English (US)",
volume = "6",
pages = "57--70",
journal = "Journal of Derivatives",
issn = "1074-1240",
publisher = "Institutional Investor, Inc",
number = "3",

}

TY - JOUR

T1 - Static hedging of timing risk

AU - Carr, Peter

AU - Picron, Jean Francois

PY - 1999/3/1

Y1 - 1999/3/1

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=84979760970&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84979760970&partnerID=8YFLogxK

U2 - 10.3905/jod.1999.319119

DO - 10.3905/jod.1999.319119

M3 - Article

VL - 6

SP - 57

EP - 70

JO - Journal of Derivatives

JF - Journal of Derivatives

SN - 1074-1240

IS - 3

ER -