A static hedging question in job screening

Hinstings · July 25th, 2006, 1:59 am

For the underlying X, a floor F, a cap C, and payoff 1/min(max(X, F), C), derive a model independent static hedge in terms of European options on X with different strikes.

bingfei · July 25th, 2006, 5:13 pm

you know your pay-off function so you can taylor expand it and take expectation and get today's value. go to Peter Carr's web where he is talking about static hedging using options.

twofish · July 25th, 2006, 8:33 pm

If you approximate the payoff with a piecewise linear function, then it seems easy, but off the top of my head I don't see how you can static hedging without a small error.Anyone else?

DavidF · July 26th, 2006, 7:59 am

Carr's formula just do the thing immediately. It works since your payoff function is clearly regular enough (you just need its second distribution derivative to be a "signed measure" [not sure that it is correct in English, I mean the difference of to measures].

bengourion · April 9th, 2008, 3:01 pm

About the Carr formula, i wonder if it works for a pay-off written on more than one asset. I tried to write down a multi underlying version of this formula but it doesn't seem to be so evident... Is there anyone to know if the formula is writeable in this case ?