Post by Sapphire Capital on Sept 15, 2008 23:20:29 GMT 4
Pricing and Hedging Gap Risk
Peter Tankov
Ecole Polytechnique, Paris
September, 04 2008
Abstract:
We analyze a new class of exotic equity derivatives called gap options or gap risk swaps. These products are designed by major banks to sell off the risk of rapid downside moves, called gaps, in the price of the underlying. We show that to price and manage gap options, jumps must necessarily be included into the model, and present explicit pricing and hedging formulas in the single asset and multi-asset case. The effect of stochastic volatility is also analyzed.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1263352
Peter Tankov
Ecole Polytechnique, Paris
September, 04 2008
Abstract:
We analyze a new class of exotic equity derivatives called gap options or gap risk swaps. These products are designed by major banks to sell off the risk of rapid downside moves, called gaps, in the price of the underlying. We show that to price and manage gap options, jumps must necessarily be included into the model, and present explicit pricing and hedging formulas in the single asset and multi-asset case. The effect of stochastic volatility is also analyzed.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1263352