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Risk Minimization for Game Options in Markets Imposing Minimal Transaction Costs

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  • Yan Dolinsky
  • Yuri Kifer

Abstract

We study partial hedging for game options in markets with transaction costs bounded from below. More precisely, we assume that the investor's transaction costs for each trade are the maximum between proportional transaction costs and a fixed transaction costs. We prove that in the continuous time Black--Scholes (BS) model, there exists a trading strategy which minimizes the shortfall risk. Furthermore, we use binomial models in order to provide numerical schemes for the calculation of the shortfall risk and the corresponding optimal portfolio in the BS model.

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  • Yan Dolinsky & Yuri Kifer, 2014. "Risk Minimization for Game Options in Markets Imposing Minimal Transaction Costs," Papers 1408.3774, arXiv.org, revised Jun 2015.
    • Handle: RePEc:arx:papers:1408.3774
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    References listed on IDEAS

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    1. Yuri Kifer, 2000. "Game options," Finance and Stochastics, Springer, vol. 4(4), pages 443-463.
    2. Paolo Guasoni, 2002. "Risk minimization under transaction costs," Finance and Stochastics, Springer, vol. 6(1), pages 91-113.
    3. Ralf Korn, 1998. "Portfolio optimisation with strictly positive transaction costs and impulse control," Finance and Stochastics, Springer, vol. 2(2), pages 85-114.
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