A Note on Mean-Variance Hedging of Non-Attainable Claims

Michael Kohlmann and Bernhard Peisl

No 00/06, CoFE Discussion Papers from University of Konstanz, Center of Finance and Econometrics (CoFE)

Abstract: A market is described by two correlated asset prices. But only one of them is traded while the contingent claim is a function of both assets. We solve the mean-variance hedging prob- lem completely and prove that the optimal strategy consists of a modified pure hedge expressible in terms of the obervation process and a Merton-type investment.

Date: 2000
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