A backward dual representation for the quantile hedging of Bermudan options

Bruno Bouchard (), Jean-François Chassagneux () and Géraldine Bouveret ()
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Bruno Bouchard: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Jean-François Chassagneux: Imperial College London
Géraldine Bouveret: Imperial College London

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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.

Keywords: Bermudan options; stochastic target problems; quantile hedging (search for similar items in EconPapers)
Date: 2016-06-01
Note: View the original document on HAL open archive server: https://hal.science/hal-01069270v2
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Citations: View citations in EconPapers (6)

Published in SIAM Journal on Financial Mathematics, 2016, 7 (1), pp.215-235

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