Recently, there has been a growing interest in optimization problems associated with the arbitrage pricing of derivative securities in imperfect markets (in particular, in models with transaction costs). In this paper, we examine the valuation and hedging of European claims in the multiplicative binomial model proposed by Cox, Ross and Rubinstein [5] (the CRR model), in the presence of proportional transaction costs. We focus on the optimality of replication; in particular, we provide sufficient...
The paper is devoted to a specific optimization problem associated with the hedging of contingent claims in continuous-time incomplete models of financial markets. Generally speaking, we place ourselves within the standard framework of the theory of continuous trading, as exposed in Harrison and Pliska [13]. Our aim is twofold. Firstly, we present a relatively concise exposition of the risk-minimizing methodology (due essentially to Follmer and Sondermann [12], Follmer and Schweizer [11] and Schweizer...
The paper deals with the modelling of mutually dependent default times of several credit names through the intensity-based approach. We extend to the case of multiple ratings some previous results due to Schmidt (1998), Kusuoka (1999) and Jarrow and Yu (2001). The issue of the arbitrage valuation of simple basket credit derivatives is also briefly examined. We argue that our approach leads, in some cases, to a significant reduction of the dimensionality of the valuation problem at hand.
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