Paper detail

Fair pricing and hedging under small perturbations of the numéraire on a finite probability space

We consider the problem of fair pricing and hedging under small perturbations of the numéraire. We show that for replicable claims, the change of numéraire affects neither the fair price nor the hedging strategy. For non-replicable claims, we demonstrate that is not the case. By reformulating the key stochastic control problem in a more tractable form, we show that both the fair price and optimal strategy are stable with respect to small perturbations of the numéraire. Further, our approach allows for explicit asymptotic formulas describing the fair price and hedging strategy's leading order correction terms. Mathematically, our results constitute stability and asymptotic analysis of a stochastic control problem under certain perturbations of the integrator of the controlled process, where constraints make this problem hard to analyze.