Related papers: Pricing and hedging in incomplete markets with coh…
In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the…
We consider a financial model with permanent price impact. Continuous time trading dynamics are derived as the limit of discrete rebalancing policies. We then study the problem of super-hedging a European option. Our main result is the…
We study indifference pricing of exotic derivatives by using hedging strategies that take static positions in quoted derivatives but trade the underlying and cash dynamically over time. We use real quotes that come with bid-ask spreads and…
It is well known that the minimal superhedging price of a contingent claim is too high for practical use. In a continuous-time model uncertainty framework, we consider a relaxed hedging criterion based on acceptable shortfall risks.…
A risk-neutral valuation framework is developed for pricing and hedging in-play football bets based on modelling scores by independent Poisson processes with constant intensities. The Fundamental Theorems of Asset Pricing are applied to…
In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams. In an incomplete market, there exist two traded risky assets (e.g. stock/commodity and weather derivative)…
We develop a general theory of risk measures that determines the optimal amount of capital to raise and invest in a portfolio of reference traded securities in order to meet a pre-specified regulatory requirement. The distinguishing feature…
The paper has 2 main goals: 1. We propose a variant of the CAPM based on coherent risk. 2. In addition to the real-world measure and the risk-neutral measure, we propose the third one: the extreme measure. The introduction of this measure…
It is shown that the axioms for coherent risk measures imply that whenever there is an asset in a portfolio that dominates the others in a given sample (which happens with finite probability even for large samples), then this portfolio…
We investigate the problem of pricing and hedging derivatives of Electricity Futures contract when the underlying asset is not available. We propose to use a cross hedging strategy based on the Futures contract covering the larger delivery…
In recent years, a market for mortality derivatives began developing as a way to handle systematic mortality risk, which is inherent in life insurance and annuity contracts. Systematic mortality risk is due to the uncertain development of…
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized…
We develop a theory for option pricing with perfect hedging in an inefficient market model where the underlying price variations are autocorrelated over a time tau. This is accomplished by assuming that the underlying noise in the system is…
This paper studies the equal risk pricing (ERP) framework for the valuation of European financial derivatives. This option pricing approach is consistent with global trading strategies by setting the premium as the value such that the…
We introduce a new model for pricing corporate bonds, which is a modification of the classical model of Merton. In this new model, we drop the liquidity assumption of the firm's asset value process, and assume that there is a liquidly…
Model-based process simulation can be used to derive designs and operating conditions of chemical processes that optimally balance multiple objectives, such as quality, costs, or environmental impacts. This work focuses on identifying…
We consider the problem of hedging a European contingent claim in a Bachelier model with transient price impact as proposed by Almgren and Chriss. Following the approach of Rogers and Singh and Naujokat and Westray, the hedging problem can…
A solution to a portfolio optimization problem is always conditioned by constraints on the initial capital and the price of the available market assets. If a risk neutral measure is known, then the price of each asset is the discounted…
In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of…
We propose a new procedure for the risk measurement of large portfolios. It employs the following objects as the building blocks: - coherent risk measures introduced by Artzner, Delbaen, Eber, and Heath; - factor risk measures introduced in…