Hedging of covered options with linear market impact and gamma constraint

B Bouchard, G Loeper and Y Zou
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B Bouchard: CEREMADE
G Loeper: FiQuant
Y Zou: CEREMADE

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Abstract: Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the super-replication price is the viscosity solution of a fully non-linear parabolic equation. As a by-product, we show how $\epsilon$-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed.

Date: 2015-12
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1512.07087

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