Perfect and partial hedging for swing game options in discrete time

TL;DR

This paper develops a framework for valuing and hedging swing game options, a type of multiple exercise derivatives, using classical hedging techniques and introduces partial hedging to minimize shortfall risk.

Contribution

It provides a formula for valuing swing game options and explores partial hedging strategies to reduce shortfall risk in discrete time.

Findings

Derived a valuation formula for swing game options

Introduced and analyzed partial hedging to minimize shortfall risk

Demonstrated hedging strategies assuming unrestricted trading of the underlying

Abstract

The paper introduces and studies hedging for game (Israeli) style extension of swing options considered as multiple exercise derivatives. Assuming that the underlying security can be traded without restrictions we derive a formula for valuation of multiple exercise options via classical hedging arguments. Introducing the notion of the shortfall risk for such options we study also partial hedging which leads to minimization of this risk.