Robust hedging of double touch barrier options
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Publication:3074989
DOI10.1137/090777487zbMATH Open1228.91067arXiv0808.4012OpenAlexW2101285166MaRDI QIDQ3074989FDOQ3074989
Authors: Jan Obłój, Alexander Matthew Gordon Cox 
Publication date: 10 February 2011
Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)
Abstract: We consider model-free pricing of digital options, which pay out if the underlying asset has crossed both upper and lower barriers. We make only weak assumptions about the underlying process (typically continuity), but assume that the initial prices of call options with the same maturity and all strikes are known. Under such circumstances, we are able to give upper and lower bounds on the arbitrage-free prices of the relevant options, and further, using techniques from the theory of Skorokhod embeddings, to show that these bounds are tight. Additionally, martingale inequalities are derived, which provide the trading strategies with which we are able to realise any potential arbitrages. We show that, depending of the risk aversion of the investor, the resulting hedging strategies can outperform significantly the standard delta/vega-hedging in presence of market frictions and/or model misspecification.
Full work available at URL: https://arxiv.org/abs/0808.4012
Recommendations
Skorokhod embeddingsuperhedgingrobust hedgingno-arbitrage pricingdouble barrier optionrisk neutral distributionsubhedging
Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44) Stochastic models in economics (91B70)
Cited In (44)
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- Investing and stopping
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- The maximum maximum of a martingale with given \(n\) marginals
- Robust static super-replication of barrier options
- Model-independent bounds for option prices -- a mass transport approach
- Processes that can be embedded in a geometric Brownian motion
- Martingale optimal transport and robust hedging in continuous time
- Robust hedging with proportional transaction costs
- Robust pricing and hedging of double no-touch options
- DIGITAL DOUBLE BARRIER OPTIONS: SEVERAL BARRIER PERIODS AND STRUCTURE FLOORS
- Pathwise versions of the Burkholder-Davis-Gundy inequality
- On joint distributions of the maximum, minimum and terminal value of a continuous uniformly integrable martingale
- PERFORMANCE OF ROBUST HEDGES FOR DIGITAL DOUBLE BARRIER OPTIONS
- On entropy martingale optimal transport theory
- Optimal control of European double barrier basket options
- Model uncertainty, recalibration, and the emergence of delta-vega hedging
- Computational methods for martingale optimal transport problems
- Robust Static Super-Replication of Barrier Options in the Black-Scholes model
- Convergence of utility indifference prices to the superreplication price in a multiple‐priors framework
- Model-free portfolio theory and its functional master formula
- Model-independent no-arbitrage conditions on American put options
- Robust Framework for Quantifying the Value of Information in Pricing and Hedging
- An explicit martingale version of the one-dimensional Brenier theorem
- Robust bounds for forward start options
- Root's barrier: construction, optimality and applications to variance options
- No-arbitrage bounds on two one-touch options
- PDE for the joint law of the pair of a continuous diffusion and its running maximum
- Model-free CPPI
- Martingale Inequalities, Optimal Martingale Transport, and Robust Superhedging
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- A model-free version of the fundamental theorem of asset pricing and the super-replication theorem
- Arbitrage bounds for prices of weighted variance swaps
- Pathwise superreplication via Vovk's outer measure
- Martingale optimal transport in the Skorokhod space
- Optimal transport and Skorokhod embedding
- Design of green bonds by double-barrier options
- Hedging with small uncertainty aversion
- Pointwise Arbitrage Pricing Theory in Discrete Time
- Probabilistic aspects of finance
- HEDGING DOUBLE BARRIERS WITH SINGLES
- Tightness and duality of martingale transport on the Skorokhod space
- Double knock-out Asian barrier options which widen or contract as they approach maturity
- Robust hedging of options on a leveraged exchange traded fund
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