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Risk Analysis and Hedging of Parisian Options under a Jump‐Diffusion Model
Author(s) -
Kim KyoungKuk,
Lim DongYoung
Publication year - 2016
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21757
Subject(s) - jump diffusion , hedge , stochastic game , jump , asset (computer security) , payment , barrier option , diffusion , economics , mathematical economics , actuarial science , econometrics , computer science , finance , physics , ecology , computer security , quantum mechanics , biology , thermodynamics
A Parisian option is a variant of a barrier option such that its payment is activated or deactivated only if the underlying asset remains above or below a barrier over a certain amount of time. We show that its complex payoff feature can cause dynamic hedging to fail. As an alternative, we investigate a quasi‐static hedge of Parisian options under a more general jump‐diffusion process. Specifically, we propose a strategy of decomposing a Parisian option into the sum of other contingent claims which are statically hedged. Through numerical experiments, we show the effectiveness of the suggested hedging strategy. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:819–850, 2016
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