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Hedging Derivatives

Author

Listed:
  • Thorsten Rheinländer

    (London School of Economics and Political Science, UK)

  • Jenny Sexton

    (University of Manchester, UK)

Abstract

Valuation and hedging of financial derivatives are intrinsically linked concepts. Choosing appropriate hedging techniques depends on both the type of derivative and assumptions placed on the underlying stochastic process. This volume provides a systematic treatment of hedging in incomplete markets. Mean-variance hedging under the risk-neutral measure is applied in the framework of exponential Lévy processes and for derivatives written on defaultable assets. It is discussed how to complete markets based upon stochastic volatility models via trading in both stocks and vanilla options. Exponential utility indifference pricing is explored via a duality with entropy minimization. Backward stochastic differential equations offer an alternative approach and are moreover applied to study markets with trading constraints including basis risk. A range of optimal martingale measures are discussed including the entropy, Esscher and minimal martingale measures. Quasi-symmetry properties of stochastic processes are deployed in the semi-static hedging of barrier options.

Individual chapters are listed in the "Chapters" tab

Suggested Citation

  • Thorsten Rheinländer & Jenny Sexton, 2011. "Hedging Derivatives," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8062, December.
    • Handle: RePEc:wsi:wsbook:8062
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    References listed on IDEAS

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    1. Secomandi, Nicola, 2022. "Quadratic hedging of risk neutral values," Energy Economics, Elsevier, vol. 112(C).

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