Option pricing with hedging at fixed trading dates

Fabio Mercurio and Ton Vorst ()

Applied Mathematical Finance, 1996, vol. 3, issue 2, 135-158

Abstract: We introduce trading restrictions in the well known Black-Scholes model and Cox-Ross-Rubinstein model, in the sense that hedging is only allowed at some fixed trading dates. As a consequence, the financial market is incomplete in both modified models. Applying Schweizer's (and Schal's) variance-optimal criterion for pricing and hedging general claims, we first analyse the dynamic consistency of the strategies which minimize the variance of the total loss due to hedging a given claim. Then we establish some convergence results, when the number of trading dates is either kept fixed or increases to infinity.

Date: 1996
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DOI: 10.1080/13504869600000007

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