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arxiv: 1503.05475 · v1 · pith:3R4BCDZPnew · submitted 2015-03-18 · 💱 q-fin.PR · math.PR· q-fin.TR

Almost-sure hedging with permanent price impact

classification 💱 q-fin.PR math.PRq-fin.TR
keywords hedgingimpactpermanentpriceadmitsalmost-sureconsidercontinuous
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We consider a financial model with permanent price impact. Continuous time trading dynamics are derived as the limit of discrete rebalancing policies. We then study the problem of super-hedging a European option. Our main result is the derivation of a quasi-linear pricing equation. It holds in the sense of viscosity solutions. When it admits a smooth solution, it provides a perfect hedging strategy.

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