Utility based pricing and hedging of jump diffusion processes with a view to applications
AbstractWe discuss utility based pricing and hedging of jump diffusion processes with emphasis on the practical applicability of the framework. We point out two difficulties that seem to limit this applicability, namely drift dependence and essential risk aversion independence. We suggest to solve these by a re-interpretation of the framework. This leads to the notion of an implied drift. We also present a heuristic derivation of the marginal indifference price and the marginal optimal hedge that might be useful in numerical computations.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1106.1395.
Date of creation: Jun 2011
Date of revision: Dec 2012
Publication status: Published in International Journal of Theoretical and Applied Finance 15 (2012) 1250052
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