Game options with gradual exercise and cancellation under proportional transaction costs

DOI10.1080/17442508.2018.1499102zbMATH Open1494.91162arXiv1612.02312OpenAlexW2565007639WikidataQ129412458 ScholiaQ129412458MaRDI QIDQ5086463FDOQ5086463

Authors: Alet Roux, Tomasz Zastawniak 

Publication date: 5 July 2022

Published in: Stochastics (Search for Journal in Brave)

Abstract: Game (Israeli) options in a multi-asset market model with proportional transaction costs are studied in the case when the buyer is allowed to exercise the option and the seller has the right to cancel the option gradually at a mixed (or randomised) stopping time, rather than instantly at an ordinary stopping time. Allowing gradual exercise and cancellation leads to increased flexibility in hedging, and hence tighter bounds on the option price as compared to the case of instantaneous exercise and cancellation. Algorithmic constructions for the bid and ask prices, and the associated superhedging strategies and optimal mixed stopping times for both exercise and cancellation are developed and illustrated. Probabilistic dual representations for bid and ask prices are also established.

Full work available at URL: https://arxiv.org/abs/1612.02312

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zbMATH Keywords

optimal stoppingtransaction costsrandomized stoppinggame options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (10)

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• A game theory analysis of options. Contributions to the theory of financial intermediation in continuous time
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