Title: Static Options Replication

Speaker:  Kyoung-Kuk (Ken) Kim,Industrial and Systems Engineering at KAIST.

Abstract: Static replication of financial options has been studied for decades. This study provides yet another systematic approach for constructing exact replications for exotic options, pushing the boundary of statically replicable financial products. The special feature of this approach lies in that we replicate target products with vanilla options via certain integral equations. The computational strength of this approach comes from the fact that hedge weights and hedging errors can be explicitly quantified via Laplace transforms under mild modeling assumptions. To make the proposed method practically feasible, we address the problem of constructing a static hedging portfolio with finitely many hedging instruments. We lastly demonstrate the applicability of the proposed method by replicating highly exotic equity linked securities that have been widely popular in South Korea.

Venue: Room 513 William M.Mong Engineering Building (Engineering Building II), the Chinese University of Hong Kong.