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

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  • Ramin Okhrati
  • Alejandro Balb'as
  • Jos'e Garrido

Abstract

In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Follmer-Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Levy 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.

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  • Ramin Okhrati & Alejandro Balb'as & Jos'e Garrido, 2015. "Hedging of defaultable claims in a structural model using a locally risk-minimizing approach," Papers 1505.03501, arXiv.org.
    • Handle: RePEc:arx:papers:1505.03501
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    References listed on IDEAS

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