Spanning Multi‐Asset Payoffs With ReLUs
Sébastien Bossu,
Stéphane Crépey and
Hoang‐Dung Nguyen
Mathematical Finance, 2025, vol. 35, issue 3, 682-707
Abstract:
We propose a distributional formulation of the spanning problem of a multi‐asset payoff by vanilla basket options. This problem is shown to have a unique solution if and only if the payoff function is even and absolutely homogeneous, and we establish a Fourier‐based formula to calculate the solution. Financial payoffs are typically piecewise linear, resulting in a solution that may be derived explicitly, yet may also be hard to exploit numerically. One‐hidden‐layer feedforward neural networks instead provide a natural and efficient numerical alternative for discrete spanning. We test this approach for a selection of archetypal payoffs and obtain better hedging results with vanilla basket options compared to industry‐favored approaches based on single‐asset vanilla hedges.
Date: 2025
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https://doi.org/10.1111/mafi.12454
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Persistent link: https://EconPapers.repec.org/RePEc:bla:mathfi:v:35:y:2025:i:3:p:682-707
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