Semi-Static Hedging Based on a Generalized Reflection Principle on a Multi Dimensional Brownian Motion

On a multi-assets Black-Scholes economy, we introduce a class of barrier options. In this model we apply a generalized reflection principle in a context of the finite reflection group acting on a Euclidean space to give a valuation formula and the semi-static hedge.Comment: Asia-Pacific Financial Markets, online firs

Self-dual continuous processes

The important application of semi-static hedging in financial markets naturally leads to the notion of quasi self-dual processes which is, for continuous semimartingales, related to symmetry properties of both their ordinary as well as their stochastic logarithms. We provide a structure result for continuous quasi self-dual processes. Moreover, we give a characterisation of continuous Ocone martingales via a strong version of self-duality

Invariance properties of random vectors and stochastic processes based on the zonoid concept

Two integrable random vectors $\xi$ and $\xi^*$ in $\mathbb {R}^d$ are said to be zonoid equivalent if, for each $u\in \mathbb {R}^d$, the scalar products $\langle\xi,u\rangle$ and $\langle\xi^*,u\rangle$ have the same first absolute moments. The paper analyses stochastic processes whose finite-dimensional distributions are zonoid equivalent with respect to time shift (zonoid stationarity) and permutation of its components (swap invariance). While the first concept is weaker than the stationarity, the second one is a weakening of the exchangeability property. It is shown that nonetheless the ergodic theorem holds for swap-invariant sequences and the limits are characterised.Comment: Published in at http://dx.doi.org/10.3150/13-BEJ519 the Bernoulli (http://isi.cbs.nl/bernoulli/) by the International Statistical Institute/Bernoulli Society (http://isi.cbs.nl/BS/bshome.htm

Operations between sets in geometry

An investigation is launched into the fundamental characteristics of operations on and between sets, with a focus on compact convex sets and star sets (compact sets star-shaped with respect to the origin) in $n$-dimensional Euclidean space $\R^n$. For example, it is proved that if $n\ge 2$, with three trivial exceptions, an operation between origin-symmetric compact convex sets is continuous in the Hausdorff metric, GL(n) covariant, and associative if and only if it is $L_p$ addition for some $1\le p\le\infty$. It is also demonstrated that if $n\ge 2$, an operation * between compact convex sets is continuous in the Hausdorff metric, GL(n) covariant, and has the identity property (i.e., $K*\{o\}=K=\{o\}*K$ for all compact convex sets $K$, where $o$ denotes the origin) if and only if it is Minkowski addition. Some analogous results for operations between star sets are obtained. An operation called $M$-addition is generalized and systematically studied for the first time. Geometric-analytic formulas that characterize continuous and GL(n)-covariant operations between compact convex sets in terms of $M$-addition are established. The term "polynomial volume" is introduced for the property of operations * between compact convex or star sets that the volume of $rK*sL$, $r,s\ge 0$, is a polynomial in the variables $r$ and $s$. It is proved that if $n\ge 2$, with three trivial exceptions, an operation between origin-symmetric compact convex sets is continuous in the Hausdorff metric, GL(n) covariant, associative, and has polynomial volume if and only if it is Minkowski addition

A Black–Scholes inequality: applications and generalisations

Abstract: The space of call price curves has a natural noncommutative semigroup structure with an involution. A basic example is the Black–Scholes call price surface, from which an interesting inequality for Black–Scholes implied volatility is derived. The binary operation is compatible with the convex order, and therefore a one-parameter sub-semigroup gives rise to an arbitrage-free market model. It is shown that each such one-parameter semigroup corresponds to a unique log-concave probability density, providing a family of tractable call price surface parametrisations in the spirit of the Gatheral–Jacquier SVI surface. An explicit example is given to illustrate the idea. The key observation is an isomorphism linking an initial call price curve to the lift zonoid of the terminal price of the underlying asset

Quasi-Self-Dual Exponential Lévy Processes

The important application of semistatic hedging in financial markets naturally leads to the notion of quasi--self-dual processes. The focus of our study is to give new characterizations of quasi--self-duality. We analyze quasi--self-dual Lévy driven markets which do not admit arbitrage opportunities and derive a set of equivalent conditions for the stochastic logarithm of quasi--self-dual martingale models. Since for nonvanishing order parameter two martingale properties have to be satisfied simultaneously, there is a nontrivial relation between the order and shift parameter representing carrying costs in financial applications. This leads to an equation containing an integral term which has to be inverted in applications. We first discuss several important properties of this equation and, for some well-known Lévy-driven models, we derive a family of closed-form inversion formulae

Pricing and hedging exotic options in stochastic volatility models

This thesis studies pricing and hedging barrier and other exotic options in continuous stochastic volatility models. Classical put-call symmetry relates the price of puts and calls under a suitable dual market transform. One well-known application is the semi-static hedging of path-dependent barrier options with European options. This, however, in its classical form requires the price process to observe rather stringent and unrealistic symmetry properties. In this thesis, we provide a general self-duality theorem to develop pricing and hedging schemes for barrier options in stochastic volatility models with correlation. A decomposition formula for pricing barrier options is then derived by Ito calculus which provides an alternative approach rather than solving a partial differential equation problem. Simulation on the performance is provided. In the last part of the thesis, via a version of the reflection principle by Desire Andre, originally proved for Brownian motion, we study its application to the pricing of exotic options in a stochastic volatility context