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Abstract: It is well known that any sufficiently regular one-dimensional payofffunction has an explicit static hedge by bonds, forward contracts and lots ofvanilla options. We show that the natural extension of the correspondingrepresentation leads to a static hedge based on the same instruments along withtraffic light options, which have recently been introduced in the market. Onebig advantage of these replication strategies is the easy structure of thehedge. Hence, traffic light options are particularly powerful building blocksfor more complicated bivariate options. While it is well known that the secondstrike derivative of non-discounted prices of vanilla options are related tothe risk-neutral density of the underlying asset price in the correspondingabsolutely continuous settings, similar statements hold for traffic lightoptions in sufficiently regular bivariate settings.



Autor: Michael Schmutz, Thomas Zürcher

Fuente: https://arxiv.org/







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