Skip to main content
Log in

Optimal partial hedging of an American option: shifting the focus to the expiration date

  • Original Article
  • Published:
Mathematical Methods of Operations Research Aims and scope Submit manuscript

Abstract

As a main contribution we present a new approach for studying the problem of optimal partial hedging of an American contingent claim in a finite and complete discrete-time market. We assume that at an early exercise time the investor can borrow the amount she has to pay for the option holder by entering a short position in the numéraire asset and that this loan in turn will mature at the expiration date. We model and solve a partial hedging problem, where the investor’s purpose is to find a minimal amount at which she can hedge the above-mentioned loan with a given probability, while the potential shortfall is bounded above by a certain number of numéraire assets. A knapsack problem approach and greedy algorithm are used in solving the problem. To get a wider view of the subject and to make interesting comparisons, we treat also a closely related European case as well as an American case where a barrier condition is applied.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Peter Lindberg.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Lindberg, P. Optimal partial hedging of an American option: shifting the focus to the expiration date. Math Meth Oper Res 75, 221–243 (2012). https://doi.org/10.1007/s00186-012-0382-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00186-012-0382-9

Keywords

Mathematics Subject Classification

Navigation