Pricing and Hedging of Financial Instruments using Forward–Backward Stochastic Differential Equations : Call Spread Options with Different Interest Rates for Borrowing and Lending

In this project, we are aiming to solve option pricing and hedging problems numerically via Backward Stochastic Differential Equations (BSDEs). We use Markovian BSDEs to formulate nonlinear pricing and hedging problems of both European and American option types. This method of formulation is crucial for pricing financial instruments since it enables consideration of market imperfections and computations in high dimensions. We conduct numerical experiments of the pricing and hedging problems, where there is a higher interest rate for borrowing than lending, using the least squares Monte Carlo and deep neural network methods. Moreover, based on the experiment results, we point out which method to chooseover the other depending on the the problem at hand