Research seminar by Dr. Sebastien Bossu, Assistant Professor of Mathematics, Mathematics & Statistics Department, UNC Charlotte

Title: Spanning Multi-Asset Payoffs with ReLUs

Abstract: We propose a distributional formulation of the spanning problem of a multi-asset payoff by vanilla basket options. This problem is shown to have a unique solution if and only if the payoff function is even and absolutely homogeneous, and we establish a Fourier-based formula to calculate the solution. Financial payoffs are typically piecewise linear, resulting in a solution that may be derived explicitly, yet may also be hard to exploit numerically. One-hidden-layer feedforward neural networks instead provide a natural and efficient numerical alternative for discrete spanning. We test this approach for a selection of archetypal payoffs and obtain better hedging results with vanilla basket options compared to industry-favored approaches based on single-asset vanilla hedges. Reference paper:  https://onlinelibrary.wiley.com/doi/full/10.1111/mafi.12454 (joint work with Hoang-Dung Nguyen and Stéphane Crépey, Université Paris-Cité)