Hedging of swing game options in continuous time

Yonatan Iron, Yuri Kifer*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

This paper introduces and studies hedging for game (Israeli) style extension of swing options in continuous time considered as multiple exercise derivatives of a base security, evolving according to the geometric Brownian motion. Assuming that the underlying security can be traded without restrictions, we derive a formula for the valuation of multiple exercise options via classical hedging arguments. This paper extends to the continuous time case the discrete time valuation results which requires substantial additional machinery such as, for instance, regularity results for value processes of Dynkin's games and the study of multiple stopping Dynkin's games. Earlier papers on valuation of multiple exercise American options viewed it only as a multiple stopping problem.

Original languageEnglish
Pages (from-to)365-404
Number of pages40
JournalStochastics
Volume83
Issue number4-6
DOIs
StatePublished - Aug 2011

Keywords

  • game options
  • hedging
  • multiple exercise derivatives
  • multiple optimal stopping
  • swing options

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