Risk minimization for game options in markets imposing minimal transaction costs. (September 2016)

• Record Type: Journal Article
• Authors: Dolinsky, Yan; Kifer, Yuri
• Is Part Of: Advances in applied probability. Volume 48:Number 3(2016)
• Page Start: 926
• Page End: 946
• Publication Date: 2016-09
• Subjects: Game option, -- transaction cost, -- hedging with friction, -- risk minimization; Primary 91G10, -- 91G20, -- Secondary 60F15, -- 60G40, -- 60G44; Probabilities -- Periodicals; Stochastic models -- Periodicals; Electronic journals; Periodicals; 519.2
• DOI: 10.1017/apr.2016.34
• Languages: English
• ISSNs: 0001-8678

Abstract

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 cost. 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.