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Dual Optimization Problem on Defaultable Claims

Author

Listed:
  • Stéphane Goutte

    (UP8 - Université Paris 8 Vincennes-Saint-Denis)

  • Armand Ngoupeyou

    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique)

Abstract

We study the pricing and hedging problem of a claim ψ whose payoff depends on the default times of two firms A and B. Thus, regarding the possible defaults of these two firms and assuming that, in the market, we can not buy or sell any defaultable bond of the firm B but only trade defaultable bond of the firm A. Our aim is then to find the best price and hedging of ψ using only bonds of the firm A. We solve this problem using indifference pricing theory which implies to solve a system of Hamilton-Jacobi-Bellman equations. Moreover, we obtain an explicit formula of the optimal hedging strategy.
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Suggested Citation

  • Stéphane Goutte & Armand Ngoupeyou, 2014. "Dual Optimization Problem on Defaultable Claims," Post-Print halshs-02175681, HAL.
    • Handle: RePEc:hal:journl:halshs-02175681
    DOI: 10.1515/mel-2013-0002
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    References listed on IDEAS

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    1. Mark Davis & Sébastien Lleo, 2010. "Risk Sensitive Investment Management with Affine Processes: A Viscosity Approach," World Scientific Book Chapters, in: Masaaki Kijima & Chiaki Hara & Keiichi Tanaka & Yukio Muromachi (ed.), Recent Advances In Financial Engineering 2009, chapter 1, pages 1-41, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Abid, Ilyes & Dhaoui, Abderrazak & Goutte, Stéphane & Guesmi, Khaled, 2019. "Contagion and bond pricing: The case of the ASEAN region," Research in International Business and Finance, Elsevier, vol. 47(C), pages 371-385.

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    1. Stephane Goutte & Armand Ngoupeyou, 2012. "Optimization problem and mean variance hedging on defaultable claims," Papers 1209.5953, arXiv.org.

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