10:00 am Friday, October 28, 2005
Mathematical Finance Seminar: Optimal Static-Dynamic Hedges for Employee Stock Options by Aytac Ilhan (Oxford University) in TBA
We consider an employee, who holds stock options, and hedges this position by using a combination of dynamic trades in the market portfolio and static positions in market traded options written on the company stock. Only options with maturities shorter than the stock options are considered in the hedge, and as these options expire, the employee takes a new static position in options available at that time. The dynamic programming principle implies that, on an option trading day, the employee solves the optimal hedging problem for a modified claim, expressed in terms of the dual value function related to exponential utility. We compare the maximum expected utilities achieved, with and without static hedging, under the assumption of lognormal price processes. Submitted by
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