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Partial super-hedging of derivatives with model risk

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Abstract

This paper studies a hedging problem in the market where an investor can observe a risky asset price process but he does not know true parameters of this process. The investor is assumed to hedge derivatives on the risky asset by a partial super-hedging strategy in order to cut the hedging cost. We show two partial differential equations which play an important role to solve the optimal hedging cost and an optimal strategy. Further we analyze the optimal hedging cost numerically by trinomial models.

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Authors and Affiliations

  1. Department of Economic Engineering, Faculty of Economics, Kyushu University, 6-19-1 Hakozaki Higashi-ku, Fukuoka, Fukuoka, 812-8581, Japan

    Koichi Matsumoto

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  1. Koichi Matsumoto
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Correspondence to Koichi Matsumoto.

Additional information

I wish to thank Prof. Shigeo Kusuoka for helpful discussions and comments. I also thank the anonymous referee for useful comments. This research was supported by JSPS KAKENHI Grant numbers 23740080 and 15K03544.

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Matsumoto, K. Partial super-hedging of derivatives with model risk. Japan J. Indust. Appl. Math. 34, 811–831 (2017). https://doi.org/10.1007/s13160-017-0267-7

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  • DOI: https://doi.org/10.1007/s13160-017-0267-7

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