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Convex Duality with Transaction Costs

Author

Listed:
  • Yan Dolinsky

    (ETH Zurich)

  • Halil Mete Soner

    (ETH Zurich and Swiss Finance Institute)

Abstract

Convex duality for two two different super-replication problems in a continuous time financial market with proportional transaction cost is proved. In this market, static hedging in a finite number of options, in addition to usual dynamic hedging with the underlying stock, are allowed. The first one of the problems considered is the model-independent hedging that requires the super-replication to hold for every continuous path. In the second one the market model is given through a probability measure P and the inequalities are understood P almost surely. The main result, using the convex duality, proves that the two super-replication problems have the same value provided that P satisfies the conditional full support property. Hence, the transaction costs prevents one from using the structure of a specific model to reduce the super-replication cost.

Suggested Citation

  • Yan Dolinsky & Halil Mete Soner, 2016. "Convex Duality with Transaction Costs," Swiss Finance Institute Research Paper Series 16-71, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1671
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    Cited by:

    1. Tomoyuki Ichiba & Seyyed Mostafa Mousavi, 2017. "Option Pricing with Delayed Information," Papers 1707.01600, arXiv.org.

    More about this item

    Keywords

    European Options; Model-free Hedging; Semi Static Hedging; Trans- action Costs; Conditional Full Support;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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