The article investigates how sensitive different dynamic and static hedge strategies for barrier options are to model risk. It is found that using plain‐vanilla options to hedge offers considerable improvements over usual Δ hedges. Further, it is shown that the hedge portfolios involving...

A new method for static hedging of barrier options under general asset dynamics is introduced. The method unifies previous approaches and nests their extensions. Using a finite set of hedge instruments the method is directly implementable and it is shown how to operationalize the hedge in a...

In the basic mean/variance framework, a stock's weight in effcient portfolios goes up if its expected rate of return goes up. In more complicated, realistic portfolio choice problems, surprising effects can occur.

We review how reflection results can be used to give simple proofs of price formulas and derivations of static hedge portfolios for barrier and lookback options in the Black-Scholes model.

We conduct an empirical evaluation of a static super-replicating hedge of barrier options. The hedge is robust to uncertainty about the future skew. Using almost seven years of current data on the DAX, we evaluate the performance of the hedge and compare it with those of both a dynamic and a...

In this paper an investigation of the pricing of callable annuities with interest-only (I-O) optionality is conducted. First the I-O optionality feature of callable annuities is introduced. Next an algorithm for pricing callable annuities with I-O optionality using the finite difference...