Risk Analysis and Hedging of Parisian Options under a Jump‐Diffusion Model

Kyoung-Kuk Kim, Young Lim

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)819-850
Number of pages32
JournalJournal of futures markets
Volume36
Issue number9
Early online date13 Oct 2015
DOIs
Publication statusPublished - 30 Sep 2016

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