Instruct: Identify the main and secondary category of Arxiv papers based on the titles and abstracts
Query: Optimal hedging of Derivatives with transaction costs   We investigate the optimal strategy over a finite time horizon for a
portfolio of stock and bond and a derivative in an multiplicative Markovian
market model with transaction costs (friction). The optimization problem is
solved by a Hamilton-Bellman-Jacobi equation, which by the verification theorem
has well-behaved solutions if certain conditions on a potential are satisfied.
In the case at hand, these conditions simply imply arbitrage-free
("Black-Scholes") pricing of the derivative. While pricing is hence not changed
by friction allow a portfolio to fluctuate around a delta hedge. In the limit
of weak friction, we determine the optimal control to essentially be of two
parts: a strong control, which tries to bring the stock-and-derivative
portfolio towards a Black-Scholes delta hedge; and a weak control, which moves
the portfolio by adding or subtracting a Black-Scholes hedge. For simplicity we
assume growth-optimal investment criteria and quadratic friction.

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The categories of this paper are: ao-sci
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The categories of this paper are: plasm-ph
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The categories of this paper are: chao-dyn
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The categories of this paper are: econ
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The categories of this paper are: nlin
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The categories of this paper are: cond-mat
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The categories of this paper are: hep-lat
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The categories of this paper are: nucl-th
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The categories of this paper are: quant-ph
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The categories of this paper are: eess
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The categories of this paper are: q-bio
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The categories of this paper are: comp-gas
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The categories of this paper are: nucl-ex
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The categories of this paper are: hep-ph
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The categories of this paper are: math
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The categories of this paper are: q-alg