Pricing and static hedging of American-style knock-in options on defaultable stocks
Autor(a) principal: | |
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Data de Publicação: | 2015 |
Outros Autores: | , |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10071/9453 |
Resumo: | This paper applies the static hedge portfolio approach (SHP) of Chung et al. (2013) in two new directions. First, the SHP approach is generalized from the constant elasticity of variance (CEV) model of Cox (1975) to the jump to default extended CEV (JDCEV) framework of Carr and Linetsky (2006). For this purpose, the recovery value of the American-style down-and-in put is hedged through the one attached to a European-style plain-vanilla contract whereas for an up-and-in put it is necessary to use the recovery component of the corresponding European-style up-and-in option. Second, the SHP methodology is adapted from single to double barrier American-style knock-in options by matching the value of the hedging portfolio along both lower and upper barriers. Finally, and to benchmark the accuracy of the novel SHP pricing solutions, the optimal stopping approach of Nunes (2009) is also extended to price American-style double knock-in options under the JDCEV framework. Such extension highlights the relevant credit derivative component embedded in American-style knock-in equity puts. |
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Pricing and static hedging of American-style knock-in options on defaultable stocksAmerican-style knock-in optionsDefaultStatic hedgingCEV modelJDCEV modelThis paper applies the static hedge portfolio approach (SHP) of Chung et al. (2013) in two new directions. First, the SHP approach is generalized from the constant elasticity of variance (CEV) model of Cox (1975) to the jump to default extended CEV (JDCEV) framework of Carr and Linetsky (2006). For this purpose, the recovery value of the American-style down-and-in put is hedged through the one attached to a European-style plain-vanilla contract whereas for an up-and-in put it is necessary to use the recovery component of the corresponding European-style up-and-in option. Second, the SHP methodology is adapted from single to double barrier American-style knock-in options by matching the value of the hedging portfolio along both lower and upper barriers. Finally, and to benchmark the accuracy of the novel SHP pricing solutions, the optimal stopping approach of Nunes (2009) is also extended to price American-style double knock-in options under the JDCEV framework. Such extension highlights the relevant credit derivative component embedded in American-style knock-in equity puts.Elsevier2015-07-27T15:24:01Z2015-01-01T00:00:00Z20152019-03-28T14:32:58Zinfo:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articleapplication/pdfhttp://hdl.handle.net/10071/9453eng0378-426610.1016/j.jbankfin.2015.05.003Nunes, J.Ruas, J.Dias, J. C.info:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2023-11-09T17:28:09Zoai:repositorio.iscte-iul.pt:10071/9453Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T22:12:35.745764Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
title |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
spellingShingle |
Pricing and static hedging of American-style knock-in options on defaultable stocks Nunes, J. American-style knock-in options Default Static hedging CEV model JDCEV model |
title_short |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
title_full |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
title_fullStr |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
title_full_unstemmed |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
title_sort |
Pricing and static hedging of American-style knock-in options on defaultable stocks |
author |
Nunes, J. |
author_facet |
Nunes, J. Ruas, J. Dias, J. C. |
author_role |
author |
author2 |
Ruas, J. Dias, J. C. |
author2_role |
author author |
dc.contributor.author.fl_str_mv |
Nunes, J. Ruas, J. Dias, J. C. |
dc.subject.por.fl_str_mv |
American-style knock-in options Default Static hedging CEV model JDCEV model |
topic |
American-style knock-in options Default Static hedging CEV model JDCEV model |
description |
This paper applies the static hedge portfolio approach (SHP) of Chung et al. (2013) in two new directions. First, the SHP approach is generalized from the constant elasticity of variance (CEV) model of Cox (1975) to the jump to default extended CEV (JDCEV) framework of Carr and Linetsky (2006). For this purpose, the recovery value of the American-style down-and-in put is hedged through the one attached to a European-style plain-vanilla contract whereas for an up-and-in put it is necessary to use the recovery component of the corresponding European-style up-and-in option. Second, the SHP methodology is adapted from single to double barrier American-style knock-in options by matching the value of the hedging portfolio along both lower and upper barriers. Finally, and to benchmark the accuracy of the novel SHP pricing solutions, the optimal stopping approach of Nunes (2009) is also extended to price American-style double knock-in options under the JDCEV framework. Such extension highlights the relevant credit derivative component embedded in American-style knock-in equity puts. |
publishDate |
2015 |
dc.date.none.fl_str_mv |
2015-07-27T15:24:01Z 2015-01-01T00:00:00Z 2015 2019-03-28T14:32:58Z |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10071/9453 |
url |
http://hdl.handle.net/10071/9453 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
0378-4266 10.1016/j.jbankfin.2015.05.003 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.format.none.fl_str_mv |
application/pdf |
dc.publisher.none.fl_str_mv |
Elsevier |
publisher.none.fl_str_mv |
Elsevier |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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1799134681554223104 |