Abstract
In the world of financial derivatives, “basis risk” is the risk that arises when the asset on which an option is written is not available for hedging - usually because there is no liquid market in it - and hedging must be done using some “closely related” asset. In this situation the market is incomplete and perfect hedging is, even in principle, impossible. In earlier work, the author proposed an approach to option valuation in incomplete markets based on utility theory. Here this approach is applied in a study of basis risk and how to minimize it.
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References
N.H. Bingham and R. Kiesel, Risk-Neutral Valuation, Springer Verlag, New York, 1998.
Mark Davis, Option Pricing in Incomplete Markets, Mathematics of Derivative Securities, M.A.H. Dempster and S.R. Pliska,1998.
I. Karatzas, Lectures on the Mathematics of Finance, American Mathematical Society, Providence RI, 1997.
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© 2000 Springer Science+Business Media New York
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Davis, M. (2000). Option Valuation and Hedging with Basis Risk. In: Djaferis, T.E., Schick, I.C. (eds) System Theory. The Springer International Series in Engineering and Computer Science, vol 518. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-5223-9_18
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DOI: https://doi.org/10.1007/978-1-4615-5223-9_18
Publisher Name: Springer, Boston, MA
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