Robust hedging with tradable options under price impact

Wednesday, April 1, 2015 - 14:00 to 15:00
703 Thackeray Hall
Speaker Information
Arash Fahim
Florida State University

Abstract or Additional Information

Abstract: We establish a model-independent duality for semi-static super-hedging price of an exotic option. The semi-static super-hedging strategy consists of dynamic position is underlying stocks under possible portfolio constraints, and static position in highly liquid call options with all strike and maturities and some less liquid exotic options. The traded exotic options are under price impact, i.e. price is given by a bid-ask chart. For the portfolio constraint, it is necessary to impose an assumption of continuous selection property. Many types of Delta and Gamma constraints satisfy this assumption. We use the Monge-Kantorovich theory of optimal mass transportation to establish our duality. Then, we derive equivalent condition for model-independent NFLVR by using the duality. We also provide some examples to justify the necessity of our assumptions.