Hedging options including transaction costs in incomplete markets

Mher Safarian

No 56, Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management

Abstract: In this paper we study a hedging problem for European options taking into account the presence of transaction costs. In incomplete markets, i.e. markets without classical restriction, there exists a unique martingale measure. Our approach is based on the Föllmer-Schweizer-Sondermann concept of risk minimizing. In discret time Markov market model we construct a risk minimizing strategy by backwards iteration. The strategy gives a closed-form formula. A continuous time market model using martingale price process shows the existence of a risk minimizing hedging strategy.

Keywords: hedging of options; incomplete markets; transaction costs; risk minimization; mean-self strategies (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-rmg
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/96524/1/783649541.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:kitwps:56

DOI: 10.5445/IR/1000040413

Access Statistics for this paper

More papers in Working Paper Series in Economics from Karlsruhe Institute of Technology (KIT), Department of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().