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arXiv · 1208.4922

Martingale Optimal Transport and Robust Hedging in Continuous Time

Yan Dolinsky·H. Mete Soner
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Abstract

The duality between the robust (or equivalently, model independent) hedging of path dependent European options and a martingale optimal transport problem is proved. The financial market is modeled through a risky asset whose price is only assumed to be a continuous function of time. The hedging problem is to construct a minimal super-hedging portfolio that consists of dynamically trading the underlying risky asset and a static position of vanilla options which can be exercised at the given, fixed maturity. The dual is a Monge-Kantorovich type martingale transport problem of maximizing the expected value of the option over all martingale measures that has the given marginal at maturity. In addition to duality, a family of simple, piecewise constant super-replication portfolios that asymptotically achieve the minimal super-replication cost is constructed.

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Yan Dolinsky, H. Mete Soner. 2013-06-18. Martingale Optimal Transport and Robust Hedging in Continuous Time. https://arxiv.org/abs/1208.4922

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