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A Backward Dual Representation for the Quantile Hedging of Bermudan Options
Bruno Bouchard, Géraldine Bouveret, Jean-François Chassagneux
Source abstract
Within a Markovian complete financial market, we consider the problem of hedging a Bermudan option with a given probability. Using stochastic target and duality arguments, we derive a backward algorithm for the Fenchel transform of the pricing function. This algorithm is similar to the usual American backward induction, except that it requires two additional Fenchel transformations at each exercise date. We provide numerical illustrations.
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