Exponential Hedging with Optimal Stopping and Application to ESO Valuation
نویسندگان
چکیده
We study the problem of hedging early exercise (American) options with respect to exponential utility within a general incomplete market model. This leads us to construct a duality formula involving relative entropy minimization and optimal stopping. We further consider claims with multiple exercises, and static-dynamic hedges of American claims with other European and American options. The problem is important for accurate valuation of Employee Stock Options (ESOs), and we demonstrate this in a standard diffusion model. We find that incorporating static hedges with market-traded options induces the holder to delay exercises, and increases the ESO cost to the firm.
منابع مشابه
Exponential Hedging with Optimal Stopping and Application to Employee Stock Option Valuation
We study the problem of hedging early exercise (American) options with respect to exponential utility within a general incomplete market model. This leads us to construct a duality formula involving relative entropy minimization and optimal stopping. We further consider claims with multiple exercises, and static-dynamic hedges of American claims with other European and American options. The pro...
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