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Variance optimal hedging for continuous time additive processes and applications
Abstract:For a large class of vanilla contingent claims, we establish an explicit Föllmer–Schweizer decomposition when the underlying is an exponential of an additive process. This allows to provide an efficient algorithm for solving the mean variance hedging problem. Applications to models derived from the electricity market are performed.
Keywords:variance-optimal hedging  Föllmer–Schweizer decomposition  Lévy's processes  electricity markets  processes with independent increments  additive processes
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