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arXiv · 1512.07087

Hedging of covered options with linear market impact and gamma constraint

B Bouchard·G Loeper·Y Zou
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Abstract

Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the super-replication price is the viscosity solution of a fully non-linear parabolic equation. As a by-product, we show how $\epsilon$-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed.

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B Bouchard, G Loeper, Y Zou. 2015-12-22. Hedging of covered options with linear market impact and gamma constraint. https://arxiv.org/abs/1512.07087

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