Volume 11, February 2007Special Issue: "Stochastic analysis and mathematical finance" in honor of Nicole El Karoui's 60th birthday
|Page(s)||197 - 216|
|Published online||19 June 2007|
Entropic Conditions and Hedging
Université de Marne-La-Vallée, Cité Descartes, 5, Bld Descartes, Champs-Sur-Marne, 77454 Marne-La-Vallée Cedex 2, France;
Revised: 6 September 2006
Revised: 12 October 2006
In many markets, especially in energy markets, electricity markets for instance, the detention of the physical asset is quite difficult. This is also the case for crude oil as treated by Davis (2000). So one can identify a good proxy which is an asset (financial or physical) (one)whose the spot price is significantly correlated with the spot price of the underlying (e.g. electicity or crude oil). Generally, the market could become incomplete. We explicit exact hedging strategies for exponential utilities when the risk premium is bounded. Our result is based upon backward stochastic differential equation (BSDE) and a good choice of admissible strategies which allows us to solve our hedging problem.
Mathematics Subject Classification: 90A09 / 34A12
Key words: Stochastic optimization / martingale representation theorem.
© EDP Sciences, SMAI, 2007
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