Hedging under an expected loss constraint with small transaction costs
Portfolio Management
2014-09-12 v2 Probability
Abstract
We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small transactions is used to obtain a tractable model. A general expansion theory is developed using the dynamic programming approach. Explicit formulae are also obtained in the special cases of an exponential or power loss function. As a corollary, we retrieve the asymptotics for the exponential utility indifference price.
Keywords
Cite
@article{arxiv.1309.4916,
title = {Hedging under an expected loss constraint with small transaction costs},
author = {Bruno Bouchard and Ludovic Moreau and Mete H. Soner},
journal= {arXiv preprint arXiv:1309.4916},
year = {2014}
}