Hedging of defaultable claims in a structural model using a locally risk-minimizing approach

Ramin Okhrati, Alejandro Balb\'as and Jos\'e Garrido

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Abstract: In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Follmer-Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Levy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral.

Date: 2015-05
New Economics Papers: this item is included in nep-rmg
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Published in Stochastic Processes and their Applications, 124, (9), 2868-2891 (2014)

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