CIRJE-F-539 "Efficient Static Replication of European Options under Exponential Levy Models"
Author Name Takahashi, Akihiko and Akira Yamazaki
Date January 2008
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Remarks Revised Version of CIRJE-F-513(2007); forthcoming in Journal of Futures Markets, Vol.29-1, 1-15, 2009.
Abstract

This paper proposes a new scheme for the static replication of European options and their portfolios. First, we derive a general approximation formula for efficient static replication as an extension of Carr and Chou [1997, 2002] and Carr and Wu [2002]. Second, we present a concrete procedure for implementing our scheme by applying it to plain vanilla options under exponential Lévy models. Finally, numerical examples in a model developed by Carr, Geman, Madan and Yor [2002] are used to demonstrate that our replication scheme is more efficient and more effective in practice than a standard static replication method.