No-arbitrage and hedging with liquid American options

DOI10.1287/MOOR.2018.0932MaRDI QIDQ5219726zbMATH OpenOpenAlexFDO

Authors Erhan Bayraktar, Zhou Zhou

Publication date 12 March 2020

Published in Mathematics of Operations Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1605.01327

zbMATH Keywords

fundamental theorem of asset pricingliquid American optionssemistatic trading strategiessubhedging/superhedging dualities

Mathematics Subject Classification ID

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

Abstract: Since most of the traded options on individual stocks is of American type it is of interest to generalize the results obtained in semi-static trading to the case when one is allowed to statically trade American options. However, this problem has proved to be elusive so far because of the asymmetric nature of the positions of holding versus shorting such options. Here we provide a unified framework and generalize the fundamental theorem of asset pricing (FTAP) and hedging dualities in arXiv:1502.06681 (to appear in Annals of Applied Probability) to the case where the investor can also short American options. Following arXiv:1502.06681, we assume that the longed American options are divisible. As for the shorted American options, we show that the divisibility plays no role regarding arbitrage property and hedging prices. Then using the method of enlarging probability spaces proposed in arXiv:1604.05517, we convert the shorted American options to European options, and establish the FTAP and sub- and super-hedging dualities in the enlarged space both with and without model uncertainty.

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Cites work

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• Continuity Properties of Optimal Stopping Value
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Cited in

(7)

• On the quasi-sure superhedging duality with frictions
• Time consistent stopping for the mean-standard deviation problem -- the discrete time case
• Arbitrage, hedging and utility maximization using semi-static trading strategies with American options
• Super-hedging American options with semi-static trading strategies under model uncertainty
• Utility maximization when shorting American options
• The Wasserstein space of stochastic processes
• Joint arbitrage-free smoothing of American call and put options surfaces

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