Interest rate option hedging portfolios without bank account
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 27 September 2019
Issue publication date: 24 February 2020
Abstract
Purpose
This paper aims to study the conditions for the hedging portfolio of any contingent claim on bonds to have no bank account part.
Design/methodology/approach
Hedging and Malliavin calculus techniques recently developed under a stochastic string framework are applied.
Findings
A necessary and sufficient condition for the hedging portfolio to have no bank account part is found. This condition is applied to a barrier option, and an example of a contingent claim whose hedging portfolio has a bank account part different from zero is provided.
Originality/value
To the best of the authors’ knowledge, this is the first time that this issue has been addressed in the literature.
Keywords
Acknowledgements
The author gratefully acknowledges the Editor-in-Chief Niklas F. Wagner, the Associate Editor who handled the paper and two anonymous referees for their helpful comments.
Citation
Bueno-Guerrero, A. (2020), "Interest rate option hedging portfolios without bank account", Studies in Economics and Finance, Vol. 37 No. 1, pp. 134-142. https://doi.org/10.1108/SEF-02-2019-0058
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited