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Pricing and hedging of derivatives based on non-tradable underlyings

Please always quote using this URN:urn:nbn:de:0296-matheon-4714
  • This paper is concerned with the study of insurance related derivatives on financial markets that are based on non-tradable underlyings, but are correlated with tradable assets. We calculate exponential utility-based indifference prices, and corresponding derivative hedges. We use the fact that they can be represented in terms of solutions of forward-backward stochastic differential equations (FBSDE) with quadratic growth generators. We derive the Markov property of such FBSDE and generalize results on the differentiability relative to the initial value of their forward components. In this case the optimal hedge can be represented by the price gradient multiplied with the correlation coefficient. This way we obtain a generalization of the classical ‘delta hedge’ in complete markets.

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Metadaten
Author:Stefan Ankirchner, Peter Imkeller, Gonçalo Dos Reis
URN:urn:nbn:de:0296-matheon-4714
Referee:Anton Bovier
Document Type:Preprint, Research Center Matheon
Language:English
Date of first Publication:2008/03/03
Release Date:2008/03/03
Institute:Humboldt-Universität zu Berlin
Preprint Number:463
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