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Performance of utility-based strategies for hedging basis risk

Abstract:

The performance of optimal strategies for hedging a claim on a non-traded asset is analysed. The claim is valued and hedged in a utility maximization framework, using exponential utility. A traded asset, correlated with that underlying the claim, is used for hedging, with the correlation ρ typically close to 1. Using a distortion method (Zariphopoulou 2001 Finance Stochastics 5 61-82) we derive a nonlinear expectation representation for the claim's ask price and a formula for the optimal hedg...

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Publication status:
Published

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Publisher copy:
10.1088/1469-7688/4/3/001

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Institution:
University of Oxford
Department:
Oxford, MPLS, Mathematical Inst
Role:
Author
Journal:
QUANTITATIVE FINANCE
Volume:
4
Issue:
3
Pages:
245-255
Publication date:
2004-06-05
DOI:
EISSN:
1469-7696
ISSN:
1469-7688
URN:
uuid:0a75fc75-0483-4338-8306-0c645f9a5302
Source identifiers:
22500
Local pid:
pubs:22500
Language:
English

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