Partial Hedging of Spread Options with a Given Probability

Betty Guo () and Alexander Melnikov ()
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Betty Guo: University of Alberta
Alexander Melnikov: University of Alberta

A chapter in Mathematical and Statistical Methods for Actuarial Sciences and Finance, 2024, pp 205-210 from Springer

Abstract: Abstract The paper develops the method of hedging a two-factor diffusion market with a given probability. We construct the maximal perfect hedging set for an option to exchange for another for which a lower bound of option price is achieved. This method is then applied to pricing “pure endowments with a guarantee” equity linked life insurance contracts. The classical approach of pricing such options provides very low gain for investors, the investor may take a given probability of risk in return of a higher gain. Taken into account this argument, the paper develops risk management strategies for this type of insurance and financial mixed instrument.

Keywords: Partial Hedging; Life Insurance; Spread Options (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-64273-9_34

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DOI: 10.1007/978-3-031-64273-9_34

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