Model-independent superhedging under portfolio constraints (Q261914)

The authors consider a discrete-time financial market where the following can be traded: risky assets (such as stocks), vanilla call options on these assets, as well as other derivatives on them, such as exotic options. They assume that the vanilla calls are liquidly traded, while the liquidity on the exotic options is limited. The authors derive a model-independent super-hedging duality in this setting, where the super-hedging portfolio can be semi-static and consists of three parts: a dynamic trading strategy in the underlying assets and static positions in the vanilla calls and the exotic options. The derivation of the super-hedging duality uses tools from the Monge-Kantorovic optimal transport theory. Moreover, as a consequence of the super-hedging duality, the authors also prove a model-independent version of the fundamental theorem of asset pricing. The framework is general enough to accommodate delta and gamma constraints.