Hedging of game options with the presence of transaction costs

DOI10.1214/12-AAP898zbMATH Open1318.91182arXiv1103.1165MaRDI QIDQ389062FDOQ389062

Yan Dolinsky

Publication date: 17 January 2014

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We study the problem of super-replication for game options under proportional transaction costs. We consider a multidimensional continuous time model, in which the discounted stock price process satisfies the conditional full support property. We show that the super-replication price is the cheapest cost of a trivial super-replication strategy. This result is an extension of previous papers (see [3] and [7]) which considered only European options. In these papers the authors showed that with the presence of proportional transaction costs the super--replication price of a European option is given in terms of the concave envelope of the payoff function. In the present work we prove that for game options the super-replication price is given by a game variant analog of the standard concave envelope term. The treatment of game options is more complicated and requires additional tools. We combine the theory of consistent price systems together with the theory of extended weak convergence which was developed in [1]. The second theory is essential in dealing with hedging which involves stopping times, like in the case of game options.

Full work available at URL: https://arxiv.org/abs/1103.1165

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zbMATH Keywords

weak convergenceoptimal stoppingtransaction costssuper-replicationgame options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10) Strong limit theorems (60F15) 2-person games (91A05) Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44)

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Cited In (11)

• The Dynkin game with regime switching and applications to pricing game options
• Duality and convergence for binomial markets with friction
• Some calculations for Israeli options
• Estimating processes in adapted Wasserstein distance
• Title not available (Why is that?)
• GAME CALL OPTIONS REVISITED
• Game options with gradual exercise and cancellation under proportional transaction costs
• Super-replication with fixed transaction costs
• Hedging of game options in discrete markets with transaction costs
• Dynkin's games and Israeli options
• Limit theorems for partial hedging under transaction costs

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