Related papers: Is the difference between deep hedging and delta h…
In most real scenarios the construction of a risk-neutral portfolio must be performed in discrete time and with transaction costs. Two human imposed constraints are the risk-aversion and the profit maximization, which together define a…
Deep hedging is a framework for hedging derivatives in the presence of market frictions. In this study, we focus on the problem of hedging a given target option by using multiple options. To extend the deep hedging framework to this…
The cryptocurrency market is volatile, non-stationary and non-continuous. Together with liquid derivatives markets, this poses a unique opportunity to study risk management, especially the hedging of options, in a turbulent market. We study…
We present an explicit hedging strategy, which enables to prove arbitrageness of market incorporating at least two assets depending on the same random factor. The implied Black-Scholes volatility, computed taking into account the form of…
Derivatives, as a critical class of financial instruments, isolate and trade the price attributes of risk assets such as stocks, commodities, and indices, aiding risk management and enhancing market efficiency. However, traditional hedging…
The recent "correlation breakdown" in the modeling of credit default swaps, in which model correlations had to exceed 100% in order to reproduce market prices of supersenior tranches, is analyzed and argued to be a fundamental market…
We study option pricing and hedging with uncertainty about a Black-Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this…
A stock market is called diverse if no stock can dominate the market in terms of relative capitalization. On one hand, this natural property leads to arbitrage in diffusion models under mild assumptions. On the other hand, it is also easy…
Abstract This paper proposes a novel approach to Bermudan swaption hedging by applying the deep hedging framework to address limitations of traditional arbitrage-free methods. Conventional methods assume ideal conditions, such as zero…
Stochastic portfolio theory aims at finding relative arbitrages, i.e. trading strategies which outperform the market with probability one. Functionally generated portfolios, which are deterministic functions of the market weights, are an…
We discuss the difference between locally risk-minimizing and delta hedging strategies for exponential L\'evy models, where delta hedging strategies in this paper are defined under the minimal martingale measure. We give firstly…
This paper introduces a potential application of deep learning and artificial intelligence in finance, particularly its application in hedging. The major goal encompasses two objectives. First, we present a framework of a direct policy…
Opportunities for stochastic arbitrage in an options market arise when it is possible to construct a portfolio of options which provides a positive option premium and which, when combined with a direct investment in the underlying asset,…
In this work a relation between a measure of short-term arbitrage in the market and the excess growth of portfolios as a notion of long-term arbitrage is established. The former originates from "Geometric Arbitrage Theory" and the latter…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
This paper presents a data-driven interpretable machine learning algorithm for semi-static hedging of Exchange Traded options, considering transaction costs with efficient run-time. Further, we provide empirical evidence on the performance…
This paper investigates the deep hedging framework, based on reinforcement learning (RL), for the dynamic hedging of swaptions, contrasting its performance with traditional sensitivity-based rho-hedging. We design agents under three…
This paper presents hedging strategies for European and exotic options in a Levy market. By applying Taylor's Theorem, dynamic hedging portfolios are con- structed under different market assumptions, such as the existence of power jump…
In the paper a problem of risk measures on a discrete-time market model with transaction costs is studied. Strategy effectiveness and shortfall risk is introduced. This paper is a generalization of quantile hedging presented in [4].
This paper investigates arbitrage properties of financial markets under distributional uncertainty using Wasserstein distance as the ambiguity measure. The weak and strong forms of the classical arbitrage conditions are considered. A…