2011/06/30 by Jochen Zahn, JOCHEN ZAHN
Decision Sciences · Economics, Econometrics and Finance · #Diffusion #Financial Risk and Volatility Modeling #Hedge #Heuristic #Jump #Jump diffusion #Limit (mathematics) #Point (geometry) #Risk and Portfolio Optimization #Stochastic processes and financial applications #q-fin.CP #q-fin.PR
paper · pdf · doi:10.1142/s0219024912500525
published in International Journal of Theoretical and Applied Finance 15(07), 1250052 (World Scientific) · 23 pages, v2: published
openalex publication_date 2012/11/01 · arxiv created 2012/12/04 · arxiv updated 2012/12/05 · openalex created_date 2016/06/24 · openalex updated_date 2026/08/05
We discuss utility based pricing and hedging of jump diffusion processes with emphasis on the practical applicability of the framework. We point out two difficulties that seem to limit this applicability, namely drift dependence and essential risk aversion independence. We suggest to solve these by a re-interpretation of the framework. This leads to the notion of an implied drift. We also present a heuristic derivation of the marginal indifference price and the marginal optimal hedge that might be useful in numerical computations.