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American and Bermudan options in currency markets under proportional transaction costs

Alet Roux and Tomasz Zastawniak

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Abstract: The pricing and hedging of a general class of options (including American, Bermudan and European options) on multiple assets are studied in the context of currency markets where trading is subject to proportional transaction costs, and where the existence of a risk-free num\'eraire is not assumed. Constructions leading to algorithms for computing the prices, optimal hedging strategies and stopping times are presented for both long and short option positions in this setting, together with probabilistic (martingale) representations for the option prices.

Date: 2011-08, Revised 2014-06
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