American options in an imperfect complete market with default

DOI10.1051/PROC/201864093MaRDI QIDQ4615505zbMATH OpenOpenAlexFDO

Authors Roxana Dumitrescu, Marie-Claire Quenez, Agnès Sulem

Publication date 29 January 2019

Published in ESAIM: Proceedings and Surveys (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1708.08675

zbMATH Keywords

defaultbackward stochastic differential equationsAmerican optionsnonlinear expectationsuperhedgingimperfect marketsreflected

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Portfolio theory (91G10) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stopping times; optimal stopping problems; gambling theory (60G40)

Abstract: We study pricing and (super)hedging for American options in an imperfect market model with default, where the imperfections are taken into account via the nonlinearity of the wealth dynamics. The payoff is given by an RCLL adapted process $(x{i}_t)$. We define the {em seller's superhedging price} of the American option as the minimum of the initial capitals which allow the seller to build up a superhedging portfolio. We prove that this price coincides with the value function of an optimal stopping problem with nonlinear expectations induced by BSDEs with default jump, which corresponds to the solution of a reflected BSDE with lower barrier. Moreover, we show the existence of a superhedging portfolio strategy. We then consider the {em buyer's superhedging price}, which is defined as the supremum of the initial wealths which allow the buyer to select an exercise time $au$ and a portfolio strategy $varphi$ so that he/she is superhedged. Under the additional assumption of left upper semicontinuity along stopping times of $(x{i}_t)$, we show the existence of a superhedge $(au,varphi)$ for the buyer, as well as a characterization of the buyer's superhedging price via the solution of a nonlinear reflected BSDE with upper barrier.

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Cited in

(15)

• Perpetual cancellable American options with convertible features
• Pricing derivatives of American and game type in incomplete markets
• Optimal stopping with \(f\)-expectations: the irregular case
• American options in a non-linear incomplete market model with default
• Corrigendum to: ``Second-order reflected backward stochastic differential equations and ``Second-order BSDEs with general reflection and game options under uncertainty
• Generalized BSDE and reflected BSDE with random time horizon
• Reflected and doubly reflected BSDEs driven by RCLL martingales
• Penalization schemes for BSDEs and reflected BSDEs with generalized driver
• A Note on Market Completeness with American Put Options
• American options in nonlinear markets
• Existence, uniqueness and strict comparison theorems for BSDEs driven by RCLL martingales
• American options and callable bonds under stochastic interest rates and endogenous bankruptcy
• Game options in an imperfect market with default
• European options in a nonlinear incomplete market model with default
• Perpetual American Standard and Lookback Options with Event Risk and Asymmetric Information

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