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

DOI10.1214/16-AAP1184MaRDI QIDQ511478zbMATHOpenAlexWikidataFDO

Authors Erhan Bayraktar, Zhou Zhou

Publication date 21 February 2017

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

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)

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.

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