Valuation and Hedging of Defaultable Game Options in a Hazard Process Model

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Valuation and Hedging of Defaultable Game Options in a Hazard Process Model

by Tom Bielecki of the Illinois Institute of Technology,
Stéphane Crépey of the Université d'Évry
Monique Jeanblanc of the Université d'Évry, and
Marek Rutkowski of the University of New South Wales

December 23, 2007

Abstract: In this paper we study the valuation and hedging of defaultable game options in reduced-form models of credit risk. We get convenient pricing formula with respect to a reference filtration and we connect arbitrage prices with a suitable notion of hedging. So we prove that arbitrage prices are also minimal superhedging prices with sigma martingale residual cost under a risk neutral measure.

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