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Variance-optimal hedging for target volatility options. (English) Zbl 1275.91127

Summary: In this paper, we consider a variance-optimal hedge for target volatility options, under exponential Lévy dynamics. Since the payoff of target volatility options is related with realized volatility of some underlying asset, which is path-dependent, it is difficult to price this instrument. Here we will derive an explicit Föllmer-Schweizer decomposition of the contingent claim of target volatility options and then give the explicit expressions of hedging strategies in both discrete time and continuous time.

MSC:

91G10 Portfolio theory
60G51 Processes with independent increments; Lévy processes
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