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Semistatic hedging and pricing American floating strike lookback options
Author(s) -
Chung SanLin,
Huang YiTa,
Shih PaiTa,
Wang JrYan
Publication year - 2019
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.21986
Subject(s) - strike price , portfolio , black–scholes model , volatility (finance) , economics , moneyness , econometrics , call option , valuation of options , exotic option , replicating portfolio , stochastic volatility , financial economics , portfolio optimization
We price an American floating strike lookback option under the Black–Scholes model with a hypothetic static hedging portfolio (HSHP) composed of nontradable European options. Our approach is more efficient than the tree methods because recalculating the option prices is much quicker. Applying put–call duality to an HSHP yields a tradable semistatic hedging portfolio (SSHP). Numerical results indicate that an SSHP has better hedging performance than a delta‐hedged portfolio. Finally, we investigate the model risk for SSHP under a stochastic volatility assumption and find that the model risk is related to the correlation between asset price and volatility.