Super-hedging American Options with Semi-static Trading Strategies under Model Uncertainty

Erhan Bayraktar and Zhou Zhou

Papers from arXiv.org

Abstract: We consider the super-hedging price of an American option in a discrete-time market in which stocks are available for dynamic trading and European options are available for static trading. We show that the super-hedging price $\pi$ is given by the supremum over the prices of the American option under randomized models. That is, $\pi=\sup_{(c_i,Q_i)_i}\sum_ic_i\phi^{Q_i}$, where $c_i \in \mathbb{R}_+$ and the martingale measure $Q^i$ are chosen such that $\sum_i c_i=1$ and $\sum_i c_iQ_i$ prices the European options correctly, and $\phi^{Q_i}$ is the price of the American option under the model $Q_i$. Our result generalizes the example given in ArXiv:1604.02274 that the highest model based price can be considered as a randomization over models.

Date: 2016-04, Revised 2017-06
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Citations: View citations in EconPapers (11)

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Journal Article: SUPER-HEDGING AMERICAN OPTIONS WITH SEMI-STATIC TRADING STRATEGIES UNDER MODEL UNCERTAINTY (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1604.04608

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