Indifference pricing and hedging in stochastic volatility models

M. R. Grasselli and T. R. Hurd

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Abstract: We apply the concepts of utility based pricing and hedging of derivatives in stochastic volatility markets and introduce a new class of "reciprocal affine" models for which the indifference price and optimal hedge portfolio for pure volatility claims are efficiently computable. We obtain a general formula for the market price of volatility risk in these models and calculate it explicitly for the case of an exponential utility.

Date: 2004-04
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