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Quadratic Hedging Methods for Defaultable Claims

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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.

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Authors and Affiliations

  1. Department of Mathematics, LMU, Theresienstr. 39, 80333, Munich, Germany

    Francesca Biagini

  2. Dipartimento di Scienze Economiche ed Aziendali (DPTEA), Luiss—Guido Carli University, via Tommasini, 1, 00162, Rome, Italy

    Alessandra Cretarola

Authors
  1. Francesca Biagini
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  2. Alessandra Cretarola
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Correspondence to Francesca Biagini.

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Biagini, F., Cretarola, A. Quadratic Hedging Methods for Defaultable Claims. Appl Math Optim 56, 425–443 (2007). https://doi.org/10.1007/s00245-007-9005-x

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  • DOI: https://doi.org/10.1007/s00245-007-9005-x

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