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Indifference valuation in incomplete binomial models

M. Musiela, E. Sokolova, T. Zariphopoulou (2010)

MathematicS In Action

The indifference valuation problem in incomplete binomial models is analyzed. The model is more general than the ones studied so far, because the stochastic factor, which generates the market incompleteness, may affect the transition propabilities and/or the values of the traded asset as well as the claim’s payoff. Two pricing algorithms are constructed which use, respectively, the minimal martingale and the minimal entropy measures. We study in detail the interplay among the different kinds of...

Integral representations of risk functions for basket derivatives

Michał Barski (2012)

Applicationes Mathematicae

The risk minimizing problem E [ l ( ( H - X T x , π ) ) ] π m i n in the multidimensional Black-Scholes framework is studied. Specific formulas for the minimal risk function and the cost reduction function for basket derivatives are shown. Explicit integral representations for the risk functions for l(x) = x and l ( x ) = x p , with p > 1 for digital, quantos, outperformance and spread options are derived.

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