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Partial hedging and cash requirements in discrete time

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  • Erdnç Akyildirim
  • Albert Altarovici

Abstract

This paper develops a discrete time version of the continuous time model of Bouchard et al. [ J. Control Optim. , 2009, 48 , 3123--3150], for the problem of finding the minimal initial data for a controlled process to guarantee reaching a controlled target with probability one. An efficient numerical algorithm, based on dynamic programming, is proposed for the quantile hedging of standard call and put options, exotic options and quantile hedging with portfolio constraints. The method is then extended to solve utility indifference pricing, good-deal bounds and expected shortfall problems.

Suggested Citation

  • Erdnç Akyildirim & Albert Altarovici, 2016. "Partial hedging and cash requirements in discrete time," Quantitative Finance, Taylor & Francis Journals, vol. 16(6), pages 929-945, June.
    • Handle: RePEc:taf:quantf:v:16:y:2016:i:6:p:929-945
    DOI: 10.1080/14697688.2015.1095347
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