Hedging of covered options with linear market impact and gamma constraint

Bruno Bouchard, Gregoire Loeper, Yiyi Zou

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the superreplication price is the viscosity solution of a fully nonlinear parabolic equation. As a by-product, we show how "-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed.

Original languageEnglish
Pages (from-to)3319-3348
Number of pages30
JournalSIAM Journal on Control and Optimization
Volume55
Issue number5
DOIs
Publication statusPublished - 1 Jan 2017

Keywords

  • Hedging
  • Price impact
  • Stochastic target

Cite this

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Hedging of covered options with linear market impact and gamma constraint. / Bouchard, Bruno; Loeper, Gregoire; Zou, Yiyi.

In: SIAM Journal on Control and Optimization, Vol. 55, No. 5, 01.01.2017, p. 3319-3348.

Research output: Contribution to journalArticleResearchpeer-review

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KW - Stochastic target

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