ON OPTIMAL SUPER-HEDGING AND SUB-HEDGING STRATEGIES

Yukihiro Tsuzuki ()
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Yukihiro Tsuzuki: Graduate School of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-0033, Japan

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 06, 1-17

Abstract: This paper proposes optimal super-hedging and sub-hedging strategies for a derivative on two underlying assets without any specification of the underlying processes. Moreover, the strategies are free from any model of the dependency between the underlying asset prices. We derive the optimal pricing bounds by finding a joint distribution under which the derivative price is equal to the hedging portfolio's value; the portfolio consists of liquid derivatives on each of the underlying assets. As examples, we obtain new super-hedging and sub-hedging strategies for several exotic options such as quanto options, exchange options, basket options, forward starting options, and knock-out options.

Keywords: Super-hedging; sub-hedging; super-replication; sub-replication; Youngs inequality; model-independent; pricing bounds (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219024913500386

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