American and Bermudan options in currency markets under proportional transaction costs

Details American and Bermudan options in currency markets under proportional transaction costs American and Bermudan options in currency markets under proportional transaction costs

2011-08-09

arxiv.org/abs/1108.1910v2

Economy

Quantitative Finance

Pricing of Securities

Scientific paper

The pricing and hedging of a general class of options (including American, Bermudan and European options) on multiple assets are studied in the context of currency markets where trading in all assets is subject to proportional transaction costs, and where the existence of a riskfree numeraire is not assumed. Probabilistic dual representations are obtained for the bid and ask prices of such options, together with constructions of hedging strategies, optimal stopping times and approximate martingale representations for both long and short option positions.

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