CIRJE-F- 513. Takahashi, Akihiko and Akira Yamazaki, "Efficient Static Replication of European Options for Exponential Levy Models", September 2007.

This paper proposes a new method of static replication for European options and their portfolio. First a general approximation formula of efficient static replication is derived, which is based on and an extension of Carr and Chou [1997,2002] and Carr and Wu [2002]. Then, the concrete procedure to implement our method with exponential Levy models is described by using examples such as plain vanilla, cash digital, asset digital and power options. Finally, numerical examples with the CGMY(Carr, Geman, Madan and Yor[2002]) model show that our replication scheme is efficient and effective in practice.