Please note that Internet Explorer version 8. Please refer to this blog post for more information. The idea is to match both the value-matching condition and the theta-matching condition on the barrier.

I reform a portfolio consisting of European and binary options regarding to the two conditions.

This improved method improves not only the replication but also the convergence speed. This paper studies the hedging performance of static replication approach proposed by Derman, Ergener, and Kani DEK, for continuous barrier options under the constant elasticity of variance CEV model of Cox and Cox and Rossand then focuses on how to improve the DEK method.

Given the time-varying volatility feature of the CEV model, I show that the DEK static hedging portfolio exhibits serious mismatches of the theta values on the barrier, particularly when one of the component options of the portfolio is around the neighborhood of expiration, which primarily explains why static portfolio values are static replication binary options 85 than zero on the barrier except at the matching points.

A modified static hedging method for continuous barrier options - Chung - - Journal of Futures Markets - Wiley Online Library

The DEK method hereafter, the improved DEK method is improved by re-forming a static replication portfolio consisting of plain vanilla options and cash-or-nothing binary options with different maturities to match both the value-matching condition and the theta-matching condition on the barrier. The numerical analyses indicate that under the CEV model, the improved DEK method earning extra cash sydney reduces replication errors for an up-and-out call option.

- Error:

Journals Books Register Sign in Sign in using your ScienceDirect credentials Username. Forgotten username or password? Sign in via your institution OpenAthens Other institution Recent Institutions.

Sign in using your ScienceDirect credentials Username. JavaScript is disabled on your browser.

Please enable JavaScript to use all the features on this page. Finance Research Letters Volume 11, Issue 3SeptemberPages Improved method for static replication under the CEV model.

Author links open the author workspace. Opens the author workspace Opens the author workspace Department of Finance at National Sun Yat-sen University, Taiwan, ROC. Abstract This paper studies the hedging performance of static replication approach proposed by Derman, Ergener, and Kani DEK, for continuous barrier options under the constant elasticity of variance CEV model of Cox and Cox and Rossand then focuses on how to improve the DEK method.

Check if you have access through your login credentials or your institution. Elsevier About ScienceDirect Remote access Shopping cart Contact and support Terms and conditions Privacy policy. Cookies are used by this site. For more information, visit the cookies page.