Recursive Method for Guaranteed Valuation of Options in Deterministic Game Theoretic Approach

Alexander Chigodaev ()
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Alexander Chigodaev: National Research University Higher School of Economics

HSE Working papers from National Research University Higher School of Economics

Abstract: We adapt a deterministic game theoretic framework in discrete time to super-hedge pricing contingent claims (CCs). The key aspect of this framework is that the worst-case scenario dictates the super-hedging price which protects counter-parties in nancial contracts from insolvencies. A general application algorithm for super-hedge pricing of European CC portfolios with piecewise linear payos, based on linear programming, is oered for practical usage. Examples of path-dependent European CCs and portfolios of vanilla European CCs are presented to highlight important features of this pricing framework.

Keywords: worst case scenario; super-hedge; guaranteed price; recursive Bellman equation; martingale measure; European option; Asian option; Lookback option; portfolio of contingent claims. (search for similar items in EconPapers)
JEL-codes: C61 C63 G11 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2016
New Economics Papers: this item is included in nep-gth
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Published in WP BRP Series: Financial Economics / FE, March 2016, pages - 27

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