Semistatic hedging and pricing American floating strike lookback options
Journal
Journal of Futures Markets
Journal Volume
39
Journal Issue
4
Pages
418-434
Date Issued
2019
Author(s)
Abstract
We price an American floating strike lookback option under the Black¡VScholes 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¡Vcall 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. ? 2018 Wiley Periodicals, Inc.
Subjects
American floating strike lookback option
dynamic hedging
model risk
put¡Vcall duality
semistatic hedging
stochastic volatility model
Type
journal article