Hedging of claims with physical delivery under convex transaction costs

Details Hedging of claims with physical delivery under convex transaction costs Hedging of claims with physical delivery under convex transaction costs

2008-10-11

arxiv.org/abs/0810.2016v1

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

We study superhedging of contingent claims with physical delivery in a discrete-time market model with convex transaction costs. Our model extends Kabanov's currency market model by allowing for nonlinear illiquidity effects. We show that an appropriate generalization of Schachermayer's robust no arbitrage condition implies that the set of claims hedgeable with zero cost is closed in probability. Combined with classical techniques of convex analysis, the closedness yields a dual characterization of premium processes that are sufficient to superhedge a given claim process. We also extend the fundamental theorem of asset pricing for general conical models.

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