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Quadratic Hedging Methods for Defaultable Claims |
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| Authors: | Francesca Biagini Alessandra Cretarola |
| Institution: | (1) Department of Mathematics, LMU, Theresienstr. 39, 80333 Munich, Germany;(2) Dipartimento di Scienze Economiche ed Aziendali (DPTEA), Luiss—Guido Carli University, via Tommasini, 1, 00162 Rome, Italy |
| Abstract: | We apply the local risk-minimization approach to defaultable claims and we compare it with intensity-based evaluation formulas and the mean-variance hedging. We solve analytically the problem of finding respectively the hedging strategy and the associated portfolio for the three methods in the case of a default put option with random recovery at maturity. |
| Keywords: | Defaultable markets Intensity-based approach Local risk-minimization Minimal martingale measure Mean-variance hedging |
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