IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1103.1165.html
   My bibliography  Save this paper

Hedging of Game Options With the Presence of Transaction Costs

Author

Listed:
  • Yan Dolinsky

Abstract

We study the problem of super-replication for game options under proportional transaction costs. We consider a multidimensional continuous time model, in which the discounted stock price process satisfies the conditional full support property. We show that the super-replication price is the cheapest cost of a trivial super-replication strategy. This result is an extension of previous papers (see [3] and [7]) which considered only European options. In these papers the authors showed that with the presence of proportional transaction costs the super--replication price of a European option is given in terms of the concave envelope of the payoff function. In the present work we prove that for game options the super-replication price is given by a game variant analog of the standard concave envelope term. The treatment of game options is more complicated and requires additional tools. We combine the theory of consistent price systems together with the theory of extended weak convergence which was developed in [1]. The second theory is essential in dealing with hedging which involves stopping times, like in the case of game options.

Suggested Citation

  • Yan Dolinsky, 2011. "Hedging of Game Options With the Presence of Transaction Costs," Papers 1103.1165, arXiv.org, revised Mar 2012.
  • Handle: RePEc:arx:papers:1103.1165
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1103.1165
    File Function: Latest version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Stéphane Villeneuve & Erik Ekstrom, 2006. "On the Value of Optimal Stopping Games," Post-Print hal-00173182, HAL.
    2. HuyËn Pham & Nizar Touzi & Jaksa Cvitanic, 1999. "A closed-form solution to the problem of super-replication under transaction costs," Finance and Stochastics, Springer, vol. 3(1), pages 35-54.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yan Dolinsky & Halil Soner, 2013. "Duality and convergence for binomial markets with friction," Finance and Stochastics, Springer, vol. 17(3), pages 447-475, July.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1103.1165. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.