Applications of a New Self-Financing Equation

TL;DR

This paper demonstrates the effects of a newly introduced self-financing condition on financial models, specifically in option hedging with limit orders and market maker strategies.

Contribution

It introduces a novel self-financing equation and applies it to two classical financial problems, offering new insights into their analysis.

Findings

Enhanced understanding of hedging European options with limit orders

Insights into optimal market maker behavior under the new condition

Potential improvements in financial modeling accuracy

Abstract

The goal of this note is to illustrate the impact of a self-financing condition recently introduced by the authors. We present the analyses of two specific applications usually considered in more traditional models in financial mathematics. They include hedging European options with limit orders and the optimal behavior of market makers.