Abstract
We consider the cost of hedging contingent claims in a financial market where the trades of two large investors can move market prices. We provide a characterization of the minimal hedging costs in terms of associated stochastic control problems. We also prove that the minimal hedging cost is a viscosity solution of a corresponding dynamic programming equation in the case of a Markov market model.
Notes
1. For a standard asset pricing theory, see the usual textbooks, e.g. Duffie [Citation10], Karatzas [Citation14] and Karatzas and Shreve [Citation15].
2. See Lemma 3.5.3 in Karatzas and Screve [Citation17] and Exercise 0.3.6 in Karatzas [Citation14].