2017/08/29 by Roxana Dumitrescu, Dumitrescu, Roxana, Marie-Claire Quenez +3
Economics, Econometrics and Finance · #Capital Investment and Risk Analysis #Economic theories and models #FOS: Economics and business #FOS: Mathematics #Optimization and Control (math.OC) #Pricing of Securities (q-fin.PR) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1708.08675
openalex publication_date 2017/08/29 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We study pricing and (super)hedging for American options in an imperfect market model with default, where the imperfections are taken into account via the nonlinearity of the wealth dynamics. The payoff is given by an RCLL adapted process (ξt). We define the \em seller's superhedging price of the American option as the minimum of the initial capitals which allow the seller to build up a superhedging portfolio. We prove that this price coincides with the value function of an optimal stopping problem with nonlinear expectations induced by BSDEs with default jump, which corresponds to the solution of a reflected BSDE with lower barrier. Moreover, we show the existence of a superhedging portfolio strategy. We then consider the \em buyer's superhedging price, which is defined as the supremum of the initial wealths which allow the buyer to select an exercise time τ and a portfolio strategy φ so that he/she is superhedged. Under the additional assumption of left upper semicontinuity along stopping times of (ξt), we show the existence of a superhedge (τ, φ) for the buyer, as well as a characterization of the buyer's superhedging price via the solution of a nonlinear reflected BSDE with upper barrier.