SIAM Journal on Control and Optimization, Vol.55, No.5, 3319-3348, 2017
HEDGING OF COVERED OPTIONS WITH LINEAR MARKET IMPACT AND GAMMA CONSTRAINT
Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the superreplication price is the viscosity solution of a fully nonlinear parabolic equation. As a by-product, we show how epsilon-optimal strategies can be constructed. Finally, a numerical resolution scheme is proposed.