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Partial Hedging of Spread Options with a Given Probability

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

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  • Betty Guo

    (University of Alberta)

  • Alexander Melnikov

    (University of Alberta)

Abstract

The paper develops the method of hedging a two-factor diffusion market with a given probability. We construct the maximal perfect hedging set for an option to exchange for another for which a lower bound of option price is achieved. This method is then applied to pricing “pure endowments with a guarantee” equity linked life insurance contracts. The classical approach of pricing such options provides very low gain for investors, the investor may take a given probability of risk in return of a higher gain. Taken into account this argument, the paper develops risk management strategies for this type of insurance and financial mixed instrument.

Suggested Citation

  • Betty Guo & Alexander Melnikov, 2024. "Partial Hedging of Spread Options with a Given Probability," Springer Books, in: Marco Corazza & Frédéric Gannon & Florence Legros & Claudio Pizzi & Vincent Touzé (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 205-210, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-64273-9_34
    DOI: 10.1007/978-3-031-64273-9_34
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