Hedging of defaultable claims in a structural model using a locally risk-minimizing approach
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In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer-Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral. © 2014 Published by Elsevier B.V. All rights reserved.
defaultable claims; föllmer-schweizer decomposition; galtchouk-kunita-watanabe decomposition; hedging strategy; locally risk-minimizing; decomposition; investments; defaultable claims; hedging strategies; locally risk-minimizing; probability measures; risk neutrals; structural modeling; risk assessment