Ruin probability for a portfolio including options (Q1850774)

The author studies a standard \((B,S)\)-market consisting of a risk-free bond, growing exponentially at a fixed rate \(r\), and a stock, having initial value \(s_0\) and evolving stochastically to a value \(s_T\) at expiration date \(T\). At time \(0\), an investor sells different types of call and put options (based on the stock, with strike prices \(x_i\) in quantities \(c_i\) and \(p_i\), resp. \((i=1,\ldots, n))\), and allocates the premium received (denoted by \(A=\sum^n_1 (c_i w_i+ p_i g_i)~,~ w_i~=~i\)-th call price, \(g_i~=~i\)-th put price) between stock and bond, with a share \(\beta\) of bonds in the portfolio. So, at time \(T\), the investor's capital would amount to \[ \varphi(s_T)=\beta A e^{rT}+ (1-\beta)A/s_0-\sum^n_1 \{ c_i(s_T- x_i)^++p_i (x_i-s_T)^+\}~~, \] where \(x^+=\max (x,0)\). The problem solved in this paper is that of finding an optimal ``strategy'' \(c_i, p_i~(i= 1,\ldots, n)\) and \(\beta\), which minimizes the investor's probability of ruin \(P(\varphi (s_T) < 0)\). The special case of \(s_T\) possessing a lognormal distribution is discussed in some detail.