English

Hedging Maturity-Specific Risk in Forward Curve Derivatives under Stochastic Volatility

Mathematical Finance 2026-06-27 v1

Abstract

We study the variance-optimal hedging of European contingent claims written on forwards. We assume that the dynamics of the underlying forward curves follow a Heath--Jarrow--Morton--Musiela stochastic partial differential equation modulated by an infinite-rank stochastic covariance component. The variance-optimal hedge is then given by the Galtchouk--Kunita--Watanabe projection with respect to some covariance-norm quotient generated by the forward curve martingale. We show density of finite-maturity and delivery-window strategies, convergence of spectral finite-rank hedge projections and an exact decomposition of the quadratic hedging error into bucket, rank and residual risk components. In enlarged filtrations, the residual risk is a stochastic-volatility floor for claims loading on non-traded covariance noise. We illustrate the hedging framework in affine stochastic covariance and multiplicative HJMM models, and give a concrete example of the decomposition in a CIR stochastic covariance model.

Cite

@article{arxiv.2606.28891,
  title  = {Hedging Maturity-Specific Risk in Forward Curve Derivatives under Stochastic Volatility},
  author = {Riccardo Alberti and Sven Karbach},
  journal= {arXiv preprint arXiv:2606.28891},
  year   = {2026}
}
R2 v1 2026-07-22T20:15:54.167Z