Any-utility neutral and indifference pricing and hedging

Issue title: Risk Finance

Article type: Research Article

Authors: Stojanovic, Srdjan D.^;

Affiliations: Department of Mathematical Sciences, University of Cincinnati, Cincinnati, OH, USA | Center for Financial Engineering, Suzhou University, Suzhou, China. E-mail: stojans@ucmail.uc.edu

Abstract: Using recent, original approach, neutral and indifference pricing PDEs are derived for general multi-dimensional Markovian diffusive market models and, under certain conditions, for any utility of wealth. In the case of portfolios of contracts the pricing PDE system is proved for neutral, while conjectured and discussed for indifference pricing. Hedging formulas are given too. Some special cases are derived as well to demonstrate the consistency with the well known results.

Keywords: Neutral pricing, indifference pricing, hedging, fundamental matrix of pricing and hedging

DOI: 10.3233/RDA-2012-0085

Journal: Risk and Decision Analysis, vol. 4, no. 2, pp. 103-118, 2013