Hedging in fractional Black–Scholes model with transaction costs

Option Hedging with Transaction Costs

Optimal Hedging of Derivatives with Transaction Costs

We investigate the optimal strategy over a finite time horizon for a portfolio of stock and bond and a derivative in an multiplicative Markovian market model with transaction costs (friction). The optimization problem is solved by a Hamilton-Bellman-Jacobi equation, which by the verification theorem has well-behaved solutions if certain conditions on a potential are satisfied. In the case at ha...

Optimal Hedging of Options with Transaction Costs

One of the most successful approaches to option hedging with transaction costs is the utility based approach, pioneered by Hodges and Neuberger (1989). Judging against the best possible tradeoff between the risk and the costs of a hedging strategy, this approach seems to achieve excellent empirical performance. However, this approach has one major drawback that prevents the broad application of...

Hedging of American options under transaction costs

We consider a continuous-time model of financial market with proportional transaction costs. Our result is a dual description of the set of initial endowments of self-financing portfolios super-replicating Americantype contingent claim. The latter is a right-continuous adapted vector process describing the number of assets to be delivered at the exercise date. We introduce a specific class of p...

Hedging Large Risks Reduces the Transaction Costs

As soon as one accepts to abandon the zero-risk paradigm of Black-Scholes, very interesting issues concerning risk control arise because diierent deenitions of the risk become unequivalent. Optimal hedges then depend on the quantity one wishes to minimize. We show that a deenition of the risk more sensitive to the extreme events generically leads to a decrease both of the probability of extreme...