Hedging of defaultable claims in a structural model using a locally risk-minimizing approach Articles uri icon

publication date

  • September 2014

start page

  • 2868

end page

  • 2891

issue

  • 9

volume

  • 124

international standard serial number (ISSN)

  • 0304-4149

electronic international standard serial number (EISSN)

  • 1879-209X

abstract

  • 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.

keywords

  • 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