Robust Local Risk-Minimizing Hedging Strategies

This article develops robust local risk-minimizing hedging strategies for contingent claims in incomplete markets with transaction costs. Using a multidimensional event tree and asymmetric norms as hedging instruments, we propose five strategies: super-replication, norm as constraint, norm as objective, and two dynamic portfolio-based methods. These approaches balance capital efficiency, risk tolerance, and adaptability. Numerical results on European call options show that norm-constrained strategies, in particular, achieve strong tail risk control at reduced cost, highlighting their practicality in diverse market conditions.