Hedging lookback and partial lookback options using Malliavin calculus

• The paper considers a Black and Scholes economy with constant coefficients. A contingent claim is said to be simple if the payoff at maturity is a function of the value of the underlying security at maturity. To replicate a simple contingent claim one uses so called delta-hedging, and the well-known strategy is derived from Itô calculus and the theory of partial differentiable equations. However, hedging path-dependent options require other tools since the price processes, in general, no longer have smooth stochastic differentials. It is shown how Malliavin calculus can be used to derive the hedging strategy for any kind of path-dependent options, and in particular for lookback and partial lookback options.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Keyword

contingent claims

hedging

lookback options

Malliavin calculus

Publication and Content Type

art (subject category)

ref (subject category)