Pricing and hedging game options in currency models with proportional transaction costs

TL;DR

This paper develops a framework for pricing and hedging game options in multi-currency models with proportional transaction costs, providing strategies, dual representations, and numerical examples.

Contribution

It introduces efficient methods for optimal hedging, cancellation, and exercise strategies, along with probabilistic dual representations for bid and ask prices.

Findings

Efficient strategies for hedging and exercising game options.

Dual representations for bid and ask prices.

Numerical examples illustrating the methods.

Abstract

The pricing, hedging, optimal exercise and optimal cancellation of game or Israeli options are considered in a multi-currency model with proportional transaction costs. Efficient constructions for optimal hedging, cancellation and exercise strategies are presented, together with numerical examples, as well as probabilistic dual representations for the bid and ask price of a game option.