Hedging of covered options with linear market impact and gamma constraint

DOI10.1137/15M1054109MaRDI QIDQ4588841zbMATH OpenOpenAlexFDO

Authors Bruno Bouchard, Grégoire Loeper, Yiyi Zou

Publication date 2 November 2017

Published in SIAM Journal on Control and Optimization (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1512.07087

zbMATH Keywords

hedgingprice impactstochastic target

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the super-replication price is the viscosity solution of a fully non-linear parabolic equation. As a by-product, we show how $epsilon$-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed.

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Cited in

(13)

• Option pricing with linear market impact and nonlinear Black-Scholes equations
• Understanding the dual formulation for the hedging of path-dependent options with price impact
• Continuous-time duality for superreplication with transient price impact
• HEDGING UNDER GAMMA CONSTRAINTS BY OPTIMAL STOPPING AND FACE-LIFTING
• Hedge and speculate: replicating option payoffs with limit and market orders
• Market impact: a systematic study of the high frequency options market
• Price impact on term structure
• On measuring the cost of liquidity in the limit order book
• Second-order stochastic target problems with generalized market impact
• Calibration of local‐stochastic volatility models by optimal transport
• Hedging with physical or cash settlement under transient multiplicative price impact
• Interior second derivatives estimates for nonlinear diffusions
• Calibration of local volatility models with stochastic interest rates using optimal transport

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