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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

Abstract

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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