Hedging of game options with the presence of transaction costs (Q389062)

A game or Israeli option is a financial derivative, where either party may exercise the option at any time. That is, the buyer may exercise to buy (call) or sell (put), and the seller may conclude the agreement usually incurring a penalty payment. In this paper, the author develops a hedging strategy for this option when proportional transaction costs are in place. Using a consistent price system approach the theory generalises the work of, among others, \textit{B. Blum} [Stat. Decis. 27, No. 4, 357--369 (2009; Zbl 1201.91235)] and \textit{P. Guasoni} et al. [Ann. Appl. Probab. 18, No. 2, 491--520 (2008; Zbl 1133.91422)]. The main result shows that the super-replication price is the cheapest cost of a trivial perfect hedge. A number of useful examples are presented to illustrate the applications of this theorem.