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Hedging of defaultable claims in a structural model using a locally risk-minimizing approach

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  • Okhrati, Ramin
  • Balbás, Alejandro
  • Garrido, José

Abstract

In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer–Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral.

Suggested Citation

  • Okhrati, Ramin & Balbás, Alejandro & Garrido, José, 2014. "Hedging of defaultable claims in a structural model using a locally risk-minimizing approach," Stochastic Processes and their Applications, Elsevier, vol. 124(9), pages 2868-2891.
    • Handle: RePEc:eee:spapps:v:124:y:2014:i:9:p:2868-2891
    DOI: 10.1016/j.spa.2014.04.001
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    References listed on IDEAS

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    Cited by:

    1. Lijun Bo & Agostino Capponi & Claudia Ceci, 2017. "Risk-Minimizing Hedging of Counterparty Risk," Papers 1709.01115, arXiv.org.
    2. Claudia Ceci & Katia Colaneri & Alessandra Cretarola, 2016. "Unit-linked life insurance policies: optimal hedging in partially observable market models," Papers 1608.07226, arXiv.org, revised Dec 2016.
    3. Juan Dong & Lyudmila Korobenko & Deniz Sezer, 2019. "Nonhedgeable risk and Credit Risk Pricing," Papers 1910.08641, arXiv.org.

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