IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-04563713.html
   My bibliography  Save this paper

A pure dual approach for hedging Bermudan options

Author

Listed:
  • Aurélien Alfonsi

    (MATHRISK - Mathematical Risk Handling - UPEM - Université Paris-Est Marne-la-Vallée - ENPC - École des Ponts ParisTech - Inria de Paris - Inria - Institut National de Recherche en Informatique et en Automatique, CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique - ENPC - École des Ponts ParisTech)

  • Ahmed Kebaier

    (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise - UEVE - Université d'Évry-Val-d'Essonne - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Jérôme Lelong

    (DAO - Données, Apprentissage et Optimisation - LJK - Laboratoire Jean Kuntzmann - Inria - Institut National de Recherche en Informatique et en Automatique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes)

Abstract

This paper develops a new dual approach to compute the hedging portfolio of a Bermudan option and its initial value. It gives a "purely dual" algorithm following the spirit of Rogers (2010) in the sense that it only relies on the dual pricing formula. The key is to rewrite the dual formula as an excess reward representation and to combine it with a strict convexification technique. The hedging strategy is then obtained by using a Monte Carlo method, solving backward a sequence of least square problems. We show convergence results for our algorithm and test it on many different Bermudan options. Beyond giving directly the hedging portfolio, the strength of the algorithm is to assess both the relevance of including financial instruments in the hedging portfolio and the effect of the rebalancing frequency.

Suggested Citation

  • Aurélien Alfonsi & Ahmed Kebaier & Jérôme Lelong, 2024. "A pure dual approach for hedging Bermudan options," Working Papers hal-04563713, HAL.
    • Handle: RePEc:hal:wpaper:hal-04563713
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-04563713. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.