When terminal facelift enforces delta constraints

DOI10.1007/S00780-015-0260-4MaRDI QIDQ2339121zbMATH OpenOpenAlexFDO

Authors Jean-Francois Chassagneux, Romuald Elie, Idris Kharroubi

Publication date 30 March 2015

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1307.6020

zbMATH Keywords

BSDEsfaceliftportfolio constraintssuperreplicationviability

Mathematics Subject Classification ID

Parabolic equations and parabolic systems (35K99) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Portfolio theory (91G10) Derivative securities (option pricing, hedging, etc.) (91G20) Optimal stochastic control (93E20)

Abstract: This paper deals with the super-replication of non path-dependent European claims under additional convex constraints on the number of shares held in the portfolio. The corresponding super-replication price of a given claim has been widely studied in the literature and its terminal value, which dominates the claim of interest, is the so-called facelift transform of the claim. We investigate under which conditions the super-replication price and strategy of a large class of claims coincide with the exact replication price and strategy of the facelift transform of this claim. In one dimension, we observe that this property is satisfied for any local volatility model. In any dimension, we exhibit an analytical necessary and sufficient condition for this property, which combines the dynamics of the stock together with the characteristics of the closed convex set of constraints. To obtain this condition, we introduce the notion of first order viability property for linear parabolic PDEs. We investigate in details several practical cases of interest: multidimensional Black Scholes model, non-tradable assets or short selling restrictions.

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Cited in

(4)

• Facelifting in utility maximization
• On superhedging under delta constraints
• Numerical approximation of general Lipschitz BSDEs with branching processes
• Hedging with physical or cash settlement under transient multiplicative price impact

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