SFB 303 Discussion Paper No. B - 121

Author: Schweizer, Martin
Title: Option Hedging for Semimartingales
Abstract: We consider a general stochastic model of frictionless continuous trading where the price process is an incomplete semimartingale. Our objective is to hedge contingent claims by using trading strategies with a small risk. To this end, we introduce a notion of local risk-minimality and show its equivalence to a new kind of stochastic optimality equation. The solution of this equation is discussed in detail, and several examples are provided. Our approach contains previous treatments of option trading as special cases.
Creation-Date: March 1989
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