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Hedging with residual risk: a BSDE approach

Please always quote using this URN:urn:nbn:de:0296-matheon-6465
  • When managing energy or weather related risk often only imperfect hedging instruments are available. In the first part we illustrate problems arising with imperfect hedging by studying a toy model. We consider an airline’s problem with covering income risk due to fluctuating kerosene prices by investing into futures written on heating oil with closely correlated price dynamics. In the second part we outline recent results on exponential utility based cross hedging concepts. They highlight in a generalization of the Black-Scholes delta hedge formula to incomplete markets. Its derivation is based on a purely stochastic approach of utility maximization. It interprets stochastic control problems in the BSDE language, and profits from the power of the stochastic calculus of variations.

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Metadaten
Author:Stefan Ankirchner, Peter Imkeller
URN:urn:nbn:de:0296-matheon-6465
Referee:Dirk Becherer
Document Type:Preprint, Research Center Matheon
Language:English
Date of first Publication:2009/07/30
Release Date:2009/07/30
Tag:
Institute:Humboldt-Universität zu Berlin
Preprint Number:649
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