Lower hedging of American contingent claims with minimal surplus risk in finite-state financial markets by mixed-integer linear programming

Abstract

The lower hedging problem with a minimal expected surplus risk criterion in incomplete markets is studied for American claims in finite state financial markets. It is shown that the lower hedging problem with linear expected surplus criterion for American contingent claims in finite state markets gives rise to a non-convex bilinear programming formulation which admits an exact linearization. The resulting mixed-integer linear program can be readily processed by available software. © 2011 Elsevier B.V. All rights reserved.