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Licensed Unlicensed Requires Authentication Published by De Gruyter December 11, 2013

Dual Optimization Problem on Defaultable Claims

Stéphane Goutte and Armand Ngoupeyou


We study the pricing and hedging problem of a claim ψ whose payoff depends on the default times of two firms A and B. Thus, regarding the possible defaults of these two firms and assuming that, in the market, we can not buy or sell any defaultable bond of the firm B but only trade defaultable bond of the firm A. Our aim is then to find the best price and hedging of ψ using only bonds of the firm A. We solve this problem using indifference pricing theory which implies to solve a system of Hamilton-Jacobi-Bellman equations. Moreover, we obtain an explicit formula of the optimal hedging strategy.

Published Online: 2013-12-11
Published in Print: 2014-7-28

©2013 Walter de Gruyter Berlin/Boston

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