Robust hedging with proportional transaction costs (Q468414)

The assumptions of the paper are the following: all call options are traded assets, the stock is also traded dynamically. These trades are subject to transaction costs. In this market, the problem of robust hedging of a given path-dependent European option is considered. Robust hedging refers to superreplication of an option for all possible stock price processes. The main approach to the solution of the problem is the connection to optimal transport. It is proved that the superreplication price can be represented as the value of a martingale optimal transport problem. The dual control problem is to find the supremum of the expectation of the options over all approximate martingale measures that also satisfy an approximate marginal condition at maturity. The proof relies on the discretization of the problem. It is shown that the original robust hedging problem can be obtained as a limit of hedging problems that are defined on finite spaces. In this case an elementary Kuhn-Tucker duality theory can be applied. Then it is proved that any sequence of probability measures that are asymptotically maximizers of these finite problems is tight. The finite step is to directly use weak convergence.