Post by Sapphire Capital on Jul 16, 2008 6:21:24 GMT 4
Static Hedging and Pricing American Options
SAN-LIN CHUNG
Department of Finance, National Taiwan University
PAI-TA SHIH
National Dong Hwa University - Department of Economics January 3, 2008
Abstract:
This paper utilizes the static portfolio approach of Derman, Ergener, and Kani (1995) and Carr, Ellis, and Gupta (1998) to hedge and price American options under the Black-Scholes (1973) model and the constant elasticity of variance (CEV) model of Cox (1975). The static hedge portfolio (SHP) of an American option is formulated by applying the value-matching and smooth-pasting conditions at the early exercise boundaries. The numerical results indicate that the pricing efficiency of our static hedging approach is comparable to some recent advanced numerical methods such as Broadie and Detemple's (1996) binomial Black-Scholes method with Richardson extrapolation (BBSR). Furthermore, our static hedging approach provides simple and intuitive derivations of the early exercise boundaries near expiration.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1100299_code599.pdf?abstractid=1100299&mirid=2
SAN-LIN CHUNG
Department of Finance, National Taiwan University
PAI-TA SHIH
National Dong Hwa University - Department of Economics January 3, 2008
Abstract:
This paper utilizes the static portfolio approach of Derman, Ergener, and Kani (1995) and Carr, Ellis, and Gupta (1998) to hedge and price American options under the Black-Scholes (1973) model and the constant elasticity of variance (CEV) model of Cox (1975). The static hedge portfolio (SHP) of an American option is formulated by applying the value-matching and smooth-pasting conditions at the early exercise boundaries. The numerical results indicate that the pricing efficiency of our static hedging approach is comparable to some recent advanced numerical methods such as Broadie and Detemple's (1996) binomial Black-Scholes method with Richardson extrapolation (BBSR). Furthermore, our static hedging approach provides simple and intuitive derivations of the early exercise boundaries near expiration.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1100299_code599.pdf?abstractid=1100299&mirid=2