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The Application of backward stochastic differential equation with stopping time in hedging American contingent claims

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  • Wang, Bo
  • Song, Ruili

Abstract

We consider a more general wealth process with a drift coefficient which is Lipschitz continuous and the portfolio process with convex constraint. We convert the problem of hedging American contingent claims into the problem of minimal solution of backward stochastic differential equation with stopping time. We adopt the penalization method for constructing the minimal solution of stochastic differential equations and obtain the upper hedging price of American contingent claims.

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  • Wang, Bo & Song, Ruili, 2009. "The Application of backward stochastic differential equation with stopping time in hedging American contingent claims," Chaos, Solitons & Fractals, Elsevier, vol. 42(5), pages 2629-2634.
    • Handle: RePEc:eee:chsofr:v:42:y:2009:i:5:p:2629-2634
    DOI: 10.1016/j.chaos.2009.03.170
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    References listed on IDEAS

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    1. N. El Karoui & S. Peng & M. C. Quenez, 1997. "Backward Stochastic Differential Equations in Finance," Mathematical Finance, Wiley Blackwell, vol. 7(1), pages 1-71, January.
    2. Bo, Wang & Qingxin, Meng, 2007. "Hedging American contingent claims with arbitrage costs," Chaos, Solitons & Fractals, Elsevier, vol. 32(2), pages 598-603.
    3. Meng, Qingxin & Wang, Bo, 2005. "Hedging American contingent claims with constrained portfolios under a higher interest rate for borrowing," Chaos, Solitons & Fractals, Elsevier, vol. 24(2), pages 617-625.
    4. Ioannis Karatzas & (*), S. G. Kou, 1998. "Hedging American contingent claims with constrained portfolios," Finance and Stochastics, Springer, vol. 2(3), pages 215-258.
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