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|Abstract:||© 2016 Society for Industrial and Applied Mathematics. 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.|
|Citation:||Bouchard, B, Moreau, L, Mete Soner, H. (2016). Hedging under an expected loss constraint with small transaction costs. SIAM Journal on Financial Mathematics, 7 (1), 508 - 551. doi:10.1137/15M1006787|
|Pages:||508 - 551|
|Type of Material:||Journal Article|
|Journal/Proceeding Title:||SIAM Journal on Financial Mathematics|
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