Quadratic Pricing and Hedging

Authors: Łukasz Delong

Publish Date: 2013

Volume: , Issue: , Pages: 173-203

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Abstract

We investigate pricing and hedging of the insurance payment process under quadratic objectives Four types of quadratic loss functions are considered First we deal with a minimal hedging error in a meansquare sense The hedging error is evaluated both under an equivalent martingale measure and the realworld measure Next we investigate locally risk minimizing strategies which lead to nonselffinancing investment portfolio processes Finally we minimize an instantaneous meanvariance risk measure of the insurer’s surplus to derive a hedging strategy The pricing and hedging strategies are characterized by linear and nonlinear BSDEs

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