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Journal Articles SIAM Journal on Control and Optimization Year : 2008

Barrier option hedging under constraints: a viscosity approach

Abstract

We study the problem of finding the minimal initial capital needed in order to hedge without risk a barrier option when the vector of proportions of wealth invested in each risky asset is constraint to lie in a closed convex domain. In the context of a Brownian diffusion model, we provide a PDE characterization of the super-hedging price. This extends the result of Broadie, Cvitanic and Soner (1998) and Cvitanic, Pham and Touzi (1999) which was obtained for plain vanilla options, and provides a natural numerical procedure for computing the corresponding super-hedging price. As a by-product, we obtain a comparison theorem for a class of parabolic PDE with relaxed Dirichet conditions involving a constraint on the gradient.
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Dates and versions

hal-00019886 , version 1 (28-02-2006)

Identifiers

  • HAL Id : hal-00019886 , version 1

Cite

Bruno Bouchard, Imen Bentahar. Barrier option hedging under constraints: a viscosity approach. SIAM Journal on Control and Optimization, 2008, 47 (4), pp.1785-1813. ⟨hal-00019886⟩
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