Related papers: Approximate hedging problem with transaction costs…
Duality for robust hedging with proportional transaction costs of path dependent European options is obtained in a discrete time financial market with one risky asset. Investor's portfolio consists of a dynamically traded stock and a static…
In incomplete financial markets, pricing and hedging European options lack a unique no-arbitrage solution due to unhedgeable risks. This paper introduces a constrained deep learning approach to determine option prices and hedging strategies…
In this paper, we investigate a portfolio selection problem with transaction costs under a two-factor stochastic volatility structure, where volatility follows a mean-reverting process with a stochastic mean-reversion level. The model…
We present a framework for hedging a portfolio of derivatives in the presence of market frictions such as transaction costs, market impact, liquidity constraints or risk limits using modern deep reinforcement machine learning methods. We…
We propose a constructive framework for the super-hedging problem of a European contingent claim under proportional transaction costs in discrete time. Our main contribution is an explicit recursive scheme that computes both the…
We consider the pricing and hedging of exotic options in a model-independent set-up using \emph{shortfall risk and quantiles}. We assume that the marginal distributions at certain times are given. This is tantamount to calibrating the model…
We explore the role that random arbitrage opportunities play in hedging financial derivatives. We extend the asymptotic pricing theory presented by Fedotov and Panayides [Stochastic arbitrage return and its implication for option pricing,…
We prove limit theorems for the super-replication cost of European options in a Binomial model with friction. The examples covered are markets with proportional transaction costs and the illiquid markets. The dual representation for the…
Sharp asymptotic lower bounds of the expected quadratic variation of discretization error in stochastic integration are given. The theory relies on inequalities for the kurtosis and skewness of a general random variable which are themselves…
This paper considers the pricing of long-term options on assets such as housing, where either government intervention or the economic nature of the asset is assumed to limit large falls in prices. The observed asset price is modelled by a…
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account…
We develop robust pricing and hedging of a weighted variance swap when market prices for a finite number of co--maturing put options are given. We assume the given prices do not admit arbitrage and deduce no-arbitrage bounds on the weighted…
Asynchronous trading in high-frequency financial markets introduces significant biases into econometric analysis, distorting risk estimates and leading to suboptimal portfolio decisions. Existing synchronization methods, such as the…
A method for pricing and superhedging European options under proportional transaction costs based on linear vector optimisation and geometric duality developed by Lohne & Rudloff (2014) is compared to a special case of the algorithms for…
We consider rate swaps which pay a fixed rate against a floating rate in presence of bid-ask spread costs. Even for simple models of bid-ask spread costs, there is no explicit strategy optimizing an expected function of the hedging error.…
In this work, we study the optimal discretization error of stochastic integrals, in the context of the hedging error in a multidimensional It\^{o} model when the discrete rebalancing dates are stopping times. We investigate the convergence,…
The studied model was suggested to design a perfect hedging strategy for a large trader. In this case the implementation of a hedging strategy affects the price of the underlying security. The feedback-effect leads to a nonlinear version of…
The local volatility model is a widely used for pricing and hedging financial derivatives. While its main appeal is its capability of reproducing any given surface of observed option prices---it provides a perfect fit---the essential…
We study super-replication of contingent claims in an illiquid market with model uncertainty. Illiquidity is captured by nonlinear transaction costs in discrete time and model uncertainty arises as our only assumption on stock price returns…
We study the optimal portfolio liquidation problem over a finite horizon in a limit order book with bid-ask spread and temporary market price impact penalizing speedy execution trades. We use a continuous-time modeling framework, but in…