Quadratic Hedging Methods for Defaultable Claims

Biagini, Francesca and Cretarola, Alessandra (2007): Quadratic Hedging Methods for Defaultable Claims. In: Applied Mathematics and Optimization, Vol. 56, No. 3: pp. 425-443

Abstract

We apply the local risk-minimization approach to defaultable claims and we compare it with intensity-based evaluation formulas and the mean-variance hedging. We solve analytically the problem of finding respectively the hedging strategy and the associated portfolio for the three methods in the case of a default put option with random recovery at maturity.

• Item Type: Journal article
• Faculties: Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISSN: 0095-4616
• Language: English