Option hedging for semimartingales
We consider a general stochastic model of frictionless continuous trading. The price process is a semimartingale and the model is incomplete. Our objective is to hedge contingent claims by using trading strategies with a small riskiness. To this end, we introduce a notion of local R-minimality and show its equivalence to a new kind of stochastic optimality equation. This equation is solved by a Girsanov transformation to a minimal equivalent martingale measure. We prove existence and uniqueness of the solution, and we provide several examples. Our approach contains previous treatments of option trading as special cases.
Volume (Year): 37 (1991)
Issue (Month): 2 (April)
|Contact details of provider:|| Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/505572/description#description|
|Order Information:|| Postal: http://http://www.elsevier.com/wps/find/supportfaq.cws_home/regional|
When requesting a correction, please mention this item's handle: RePEc:eee:spapps:v:37:y:1991:i:2:p:339-363. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.