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Pricing and Hedging of Multi Type Contracts under Multidimensional Risks in Incomplete Markets Modeled by General Itô SDE Systems

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Abstract

The HARA and CARA theory of pricing, and the theory of partial, yet the most conservative hedging, of a single (liquid) tradable derivative contract under multidimensionality of risks in incomplete markets, including markets with non-hedgable interest rate risks, was developed by the author in a recent paper. In the present paper this theory is extended to the general case of simultaneous pricing and hedging of multiple (types of) such contracts. The results are based on the generalization of the “fundamental matrix of derivatives pricing and hedging” to include multiple contracts. Some applications are discussed as well.

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Authors and Affiliations

  1. Department of Mathematical Sciences, University of Cincinnati, Cincinnati, OH, 45221-0025, USA

    Srdjan D. Stojanovic

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  1. Srdjan D. Stojanovic
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Correspondence to Srdjan D. Stojanovic.

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Stojanovic, S.D. Pricing and Hedging of Multi Type Contracts under Multidimensional Risks in Incomplete Markets Modeled by General Itô SDE Systems. Asia-Pacific Finan Markets 13, 345–372 (2006). https://doi.org/10.1007/s10690-007-9049-6

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  • DOI: https://doi.org/10.1007/s10690-007-9049-6

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