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Minimizing shortfall risk for multiple assets derivatives

  • Michal Barski
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    The risk minimizing problem $\mathbf{E}[l((H-X_T^{x,\pi})^{+})]\overset{\pi}{\longrightarrow}\min$ in the Black-Scholes framework with correlation is studied. General formulas for the minimal risk function and the cost reduction function for the option $H$ depending on multiple underlying are derived. The case of a linear and a strictly convex loss function $l$ are examined. Explicit computation for $l(x)=x$ and $l(x)=x^p$, with $p>1$ for digital, quantos, outperformance and spread options are presented. The method is based on the quantile hedging approach presented in \cite{FL1}, \cite{FL2} and developed for the multidimensional options in \cite{Barski}.

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    File URL: http://arxiv.org/pdf/1102.3928
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    Paper provided by arXiv.org in its series Papers with number 1102.3928.

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    Date of creation: Feb 2011
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    Handle: RePEc:arx:papers:1102.3928
    Contact details of provider: Web page: http://arxiv.org/

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