Robust Hedging with Proportional Transaction Costs

Yan Dolinsky and Halil Mete Soner
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Yan Dolinsky: ETH Zürich
Halil Mete Soner: ETH Zürich; Swiss Finance Institute

No 13-11, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: 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 position in vanilla options which can be exercised at maturity. Only stock trading is subject to proportional transaction costs. The main theorem is duality between hedging and a Monge-Kantorovich type optimization problem. In this dual transport problem the optimization is over all the probability measures which satisfy an approximate martingale condition related to consistent price systems in addition to the usual marginal constraints.

Keywords: European options; Robust hedging; Transaction costs; Weak convergence; Consistent price systems; Optimal transport (search for similar items in EconPapers)
JEL-codes: D52 G11 G13 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2013-03
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1311

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