A Pure Dual Approach for Hedging Bermudan Options
Year: 2025
Type: article
Abstract: 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 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.
Source: Mathematical Finance
DOI: 10.1111/mafi.12460
Authors: Aurélien Alfonsi, Ahmed Kebaier, Jérôme Lelong
Institutions: Institut national de recherche en sciences et technologies du numérique, École nationale des ponts et chaussées, CERMICS, MATHRISK: Mathematical Risk handling, Centre National de la Recherche Scientifique, Université Paris-Saclay, Laboratoire de Mathématiques et Modélisation d'Évry, Université d'Évry Val-d'Essonne, Institut polytechnique de Grenoble, Laboratoire Jean Kuntzmann, Université Grenoble Alpes
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,840
Funder: Fondation du Risque
OpenAlex ID: W4408318460