Neutral and Indifference Portfolio Pricing, Hedging and Investing

Abstract

except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks, and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights.

Fractional Wishart processes and ε-fractional Wishart processes with applications

“…In this financial model, we price a forward contract for instantaneous variance with a payoff ϑ(u T (ε)) = u T (ε) − ι, where T > 0 is the delivery time and ι is the delivery price. Such contract is also consider in [44] for the utility-based pricing.…”

Pricing Illiquid Options With N + 1 Liquid Proxies Using Mixed Dynamic-Static Hedging

“…For simple models of the underlyings (such as e.g. Geometric Brownian Motion, which is also our setting as well), this allows one to express γ in the explicit form via parameters of the domestic and foreign assets (see [18], Eq. 7.3.11).…”

“…This implies that the choice γ=1 with a logarithmic utility function which is frequently used in the literature might not be very realistic. Note that a closed form expression for γ is obtained in [18] for stochastic interest rates.…”

Neutral and indifference pricing with stochastic correlation and volatility

“…Two concepts of pricing could be distinguished in the following way: the neutral price is the price at which it is optimal for the investor to make no investment (neither long nor short) into the asset (or the portfolio of assets), while the indifference price is the price at which it is irrelevant whether the investor make investments into the the asset (or the portfolio of assets) or not from the point of view of investing in the rest of the market ( [24]). Above all, in [25], Stojanovic established a feasible and systemic method to obtain the neutral and indifference price of a European-style financial contract (or contracts per single).…”

“…Usually, C t is assumed to be constant ( [9] and [19] are such cases), which is hard to guarantee the true property of the incomplete market. The PDE systems of neutral and indifference pricing introduced by Stojanovic [25] are proved to be efficient for general European-style financial contracts with Itô specification and avoid the assumption that C t is constant by determining the unknown coefficient in the pricing PDE. However, to the best of our knowledge, there is no paper to study the utility-based pricing for WASC model.…”