A backward dual representation for the quantile hedging of Bermudan options

DOI10.1137/15M1029461zbMATH Open1339.91114arXiv1409.8219OpenAlexW2949300236MaRDI QIDQ2808185FDOQ2808185

Authors: Bruno Bouchard, Géraldine Bouveret, Jean-Francois Chassagneux 

Publication date: 20 May 2016

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: Within a Markovian complete financial market, we consider the problem of hedging a Bermudan option with a given probability. Using stochastic target and duality arguments, we derive a backward numerical scheme for the Fenchel transform of the pricing function. This algorithm is similar to the usual American backward induction, except that it requires two additional Fenchel transformations at each exercise date. We provide numerical illustrations.

Full work available at URL: https://arxiv.org/abs/1409.8219

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zbMATH Keywords

quantile hedgingstochastic target problemsBermudan options

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60) Diffusion processes (60J60) Dynamic programming in optimal control and differential games (49L20) Financial applications of other theories (91G80)

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Cited In (8)

• Dual valuation and hedging of Bermudan options
• A comparison principle for PDEs arising in approximate hedging problems: application to Bermudan options
• A numerical scheme for the quantile hedging problem
• A new Mertens decomposition of \(\mathscr{Y}^{g , \xi} \)-submartingale systems. Application to BSDEs with weak constraints at stopping times
• A level-set approach for stochastic optimal control problems under controlled-loss constraints
• Title not available (Why is that?)
• Portfolio optimization under a quantile hedging constraint
• Dual representation of the cost of designing a portfolio satisfying multiple risk constraints

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