Hedging under an expected loss constraint with small transaction costs

Bruno Bouchard; Ludovic Moreau; Mete Soner

We consider the problem of option hedging in a market with proportional transaction costs. Since super-replication is very costly in such markets, we replace perfect hedging with an expected loss constraint. Asymptotic analysis for small transaction costs is used to obtain a tractable model. A general expansion theory is developed using the dynamic programming approach. Explicit formulae are obtained in the special cases of exponential and power utility functions. As a corollary, we retrieve the asymptotics for the exponential utility indifference price

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Year of publication:	2014
Authors:	Bouchard, Bruno ; Moreau, Ludovic ; Soner, Halil Mete
Publisher:	Genève : Swiss Finance Inst.
Subject:	Expected loss constraint \| hedging \| transaction cost \| asymptotic expansion \| Hedging \| Transaktionskosten \| Transaction costs \| Theorie \| Theory \| Portfolio-Management \| Portfolio selection \| Erwartungsbildung \| Expectation formation \| Verlust \| Loss

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