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Methods of Partial Hedging

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  • Jakša Cvitanić

Abstract

In this article we survey methods of dealing with the following problem: A financial agent is trying to hedge a claim C, without having enough initial capital to perform a perfect (super) replication. In particular, we describe results for minimizing the expected loss of hedging the claim C both in complete and incomplete continuous-time financial market models, and for maximizing the probability of perfect hedge in complete markets and markets with partial information. In these cases, the optimal strategy is in the form of a binary option on C, depending on the Radon-Nikodym derivative of the equivalent martingale measure which is optimal for a corresponding dual problem. We also present results on dynamic measures for the risk associated with the liability C, defined as the supremum over different scenarios of the minimal expected loss of hedging C. Copyright Kluwer Academic Publishers 1999

Suggested Citation

  • Jakša Cvitanić, 1999. "Methods of Partial Hedging," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 6(1), pages 7-35, January.
    • Handle: RePEc:kap:apfinm:v:6:y:1999:i:1:p:7-35
    DOI: 10.1023/A:1010054408714
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    References listed on IDEAS

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    1. Browne, S., 1996. "Reaching Goals by a Deadline: Digital Options and Continuous-Time Active Portfolio Management," Papers 96-16, Columbia - Graduate School of Business.
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    Cited by:

    1. Leonel Pérez-Hernández, 2005. "On the Existence of Efficient Hedge for an American Contingent Claim: Discrete Time Market," Department of Economics and Finance Working Papers EC200505, Universidad de Guanajuato, Department of Economics and Finance.

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