Discussion Papers 2016

CIRJE-F-1008	"Rebalancing Static Super-Replications"
Author Name	Takahashi, Akihiko and Yukihiro Tsuzuki
Date	April 2016
Full Paper	PDF File
Remarks	Revised in October 2016, forthcoming in International Journal of Financial Engineering 4.01 (2017): 1750003.

Abstract
This paper proposes a trading strategy that dynamically rebalances static super-replicating portfolios, which is very useful for both investment and hedging strategies. In order to investigate general properties of the strategy, we derive the Doob-Meyer decomposition for the value process without any specications of models under the continuous processes of the underlying variables. In particular, we nd that the in- creasing part of the decomposition characterizes the performance of the strategy. Also, we obtain more concrete features for cross-currency and one-touch options based on our general framework. Moreover, nu- merical examples for cross-currency options demonstrate the effectiveness of our strategy for investment and hedging.
Keywords:

Abstract

This paper proposes a trading strategy that dynamically rebalances static super-replicating portfolios, which is very useful for both investment and hedging strategies. In order to investigate general properties of the strategy, we derive the Doob-Meyer decomposition for the value process without any specications of models under the continuous processes of the underlying variables. In particular, we nd that the in- creasing part of the decomposition characterizes the performance of the strategy. Also, we obtain more concrete features for cross-currency and one-touch options based on our general framework. Moreover, nu- merical examples for cross-currency options demonstrate the effectiveness of our strategy for investment and hedging.

Keywords: