Arbitrage, hedging and utility maximization using semi-static trading strategies with American options

DOI10.1214/16-AAP1184zbMATH Open1357.91046arXiv1502.06681OpenAlexW3125400993WikidataQ86254402 ScholiaQ86254402MaRDI QIDQ511478FDOQ511478

Erhan Bayraktar, Zhou Zhou

Publication date: 21 February 2017

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

Abstract: We consider a financial market where stocks are available for dynamic trading, and European and American options are available for static trading (semi-static trading strategies). We assume that the American options are infinitely divisible, and can only be bought but not sold. In the first part of the paper, we work within the framework without model ambiguity. We first get the fundamental theorem of asset pricing (FTAP). Using the FTAP, we get the dualities for the hedging prices of European and American options. Based on the hedging dualities, we also get the duality for the utility maximization. In the second part of the paper, we consider the market which admits non-dominated model uncertainty. We first establish the hedging result, and then using the hedging duality we further get the FTAP. Due to the technical difficulty stemming from the non-dominancy of the probability measure set, we use a discretization technique and apply the minimax theorem.

Full work available at URL: https://arxiv.org/abs/1502.06681

zbMATH Keywords

utility maximizationAmerican optionsasset pricinghedging dualitysemi-static trading strategies

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Martingales with discrete parameter (60G42) Dynamic programming in optimal control and differential games (49L20) Stopping times; optimal stopping problems; gambling theory (60G40) Optimal stochastic control (93E20)

Cited In (5)

• Exponential Hedging with Optimal Stopping and Application to Employee Stock Option Valuation
• No-Arbitrage and Hedging with Liquid American Options
• Time Consistent Stopping for the Mean-Standard Deviation Problem---The Discrete Time Case
• SUPER-HEDGING AMERICAN OPTIONS WITH SEMI-STATIC TRADING STRATEGIES UNDER MODEL UNCERTAINTY
• Utility Maximization When Shorting American Options

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