# American Institute of Mathematical Sciences

January  2014, 10(1): 207-218. doi: 10.3934/jimo.2014.10.207

## Variance-optimal hedging for target volatility options

 1 School of Mathematical Sciences, Nankai University, Tianjin 300071, China 2 School of Business, Nankai University, Tianjin 300071, China

Received  March 2012 Revised  March 2013 Published  October 2013

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.
Citation: Xingchun Wang, Yongjin Wang. Variance-optimal hedging for target volatility options. Journal of Industrial & Management Optimization, 2014, 10 (1) : 207-218. doi: 10.3934/jimo.2014.10.207
##### References:

show all references

##### References:
 [1] Xingchun Wang, Yongjin Wang. Hedging strategies for discretely monitored Asian options under Lévy processes. Journal of Industrial & Management Optimization, 2014, 10 (4) : 1209-1224. doi: 10.3934/jimo.2014.10.1209 [2] Lorella Fatone, Francesca Mariani, Maria Cristina Recchioni, Francesco Zirilli. Pricing realized variance options using integrated stochastic variance options in the Heston stochastic volatility model. Conference Publications, 2007, 2007 (Special) : 354-363. doi: 10.3934/proc.2007.2007.354 [3] Edson Pindza, Francis Youbi, Eben Maré, Matt Davison. Barycentric spectral domain decomposition methods for valuing a class of infinite activity Lévy models. Discrete & Continuous Dynamical Systems - S, 2019, 12 (3) : 625-643. doi: 10.3934/dcdss.2019040 [4] Yang Yang, Kaiyong Wang, Jiajun Liu, Zhimin Zhang. Asymptotics for a bidimensional risk model with two geometric Lévy price processes. Journal of Industrial & Management Optimization, 2019, 15 (2) : 481-505. doi: 10.3934/jimo.2018053 [5] Shuang Li, Chuong Luong, Francisca Angkola, Yonghong Wu. Optimal asset portfolio with stochastic volatility under the mean-variance utility with state-dependent risk aversion. Journal of Industrial & Management Optimization, 2016, 12 (4) : 1521-1533. doi: 10.3934/jimo.2016.12.1521 [6] Galina Kurina, Sahlar Meherrem. Decomposition of discrete linear-quadratic optimal control problems for switching systems. Conference Publications, 2015, 2015 (special) : 764-774. doi: 10.3934/proc.2015.0764 [7] Wen Chen, Song Wang. A finite difference method for pricing European and American options under a geometric Lévy process. Journal of Industrial & Management Optimization, 2015, 11 (1) : 241-264. doi: 10.3934/jimo.2015.11.241 [8] Yongxia Zhao, Rongming Wang, Chuancun Yin. Optimal dividends and capital injections for a spectrally positive Lévy process. Journal of Industrial & Management Optimization, 2017, 13 (1) : 1-21. doi: 10.3934/jimo.2016001 [9] Siwei Yu, Jianwei Ma, Stanley Osher. Geometric mode decomposition. Inverse Problems & Imaging, 2018, 12 (4) : 831-852. doi: 10.3934/ipi.2018035 [10] Stefano Bianchini, Daniela Tonon. A decomposition theorem for $BV$ functions. Communications on Pure & Applied Analysis, 2011, 10 (6) : 1549-1566. doi: 10.3934/cpaa.2011.10.1549 [11] Xueqin Li, Chao Tang, Tianmin Huang. Poisson $S^2$-almost automorphy for stochastic processes and its applications to SPDEs driven by Lévy noise. Discrete & Continuous Dynamical Systems - B, 2018, 23 (8) : 3309-3345. doi: 10.3934/dcdsb.2018282 [12] Duo Wang, Zheng-Fen Jin, Youlin Shang. A penalty decomposition method for nuclear norm minimization with l1 norm fidelity term. Evolution Equations & Control Theory, 2019, 8 (4) : 695-708. doi: 10.3934/eect.2019034 [13] Kais Hamza, Fima C. Klebaner, Olivia Mah. Volatility in options formulae for general stochastic dynamics. Discrete & Continuous Dynamical Systems - B, 2014, 19 (2) : 435-446. doi: 10.3934/dcdsb.2014.19.435 [14] Jonathan H. Tu, Clarence W. Rowley, Dirk M. Luchtenburg, Steven L. Brunton, J. Nathan Kutz. On dynamic mode decomposition: Theory and applications. Journal of Computational Dynamics, 2014, 1 (2) : 391-421. doi: 10.3934/jcd.2014.1.391 [15] Steven L. Brunton, Joshua L. Proctor, Jonathan H. Tu, J. Nathan Kutz. Compressed sensing and dynamic mode decomposition. Journal of Computational Dynamics, 2015, 2 (2) : 165-191. doi: 10.3934/jcd.2015002 [16] Fritz Colonius, Paulo Régis C. Ruffino. Nonlinear Iwasawa decomposition of control flows. Discrete & Continuous Dynamical Systems - A, 2007, 18 (2&3) : 339-354. doi: 10.3934/dcds.2007.18.339 [17] Thiago Ferraiol, Mauro Patrão, Lucas Seco. Jordan decomposition and dynamics on flag manifolds. Discrete & Continuous Dynamical Systems - A, 2010, 26 (3) : 923-947. doi: 10.3934/dcds.2010.26.923 [18] Mauro Patrão, Luiz A. B. San Martin. Morse decomposition of semiflows on fiber bundles. Discrete & Continuous Dynamical Systems - A, 2007, 17 (3) : 561-587. doi: 10.3934/dcds.2007.17.561 [19] Manman Li, George Yin. Optimal threshold strategies with capital injections in a spectrally negative Lévy risk model. Journal of Industrial & Management Optimization, 2019, 15 (2) : 517-535. doi: 10.3934/jimo.2018055 [20] Jacinto Marabel Romo. A closed-form solution for outperformance options with stochastic correlation and stochastic volatility. Journal of Industrial & Management Optimization, 2015, 11 (4) : 1185-1209. doi: 10.3934/jimo.2015.11.1185

2018 Impact Factor: 1.025