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- Title
An example of indifference prices under exponential preferences.
- Authors
Musiela, Marek; Zariphopoulou, Thaleia
- Abstract
The aim herein is to analyze utility-based prices and hedging strategies. The analysis is based on an explicitly solved example of a European claim written on a nontraded asset, in a model where risk preferences are exponential, and the traded and nontraded asset are diffusion processes with, respectively, lognormal and arbitrary dynamics. Our results show that a nonlinear pricing rule emerges with certainty equivalent characteristics, yielding the price as a nonlinear expectation of the derivative’s payoff under the appropriate pricing measure. The latter is a martingale measure that minimizes its relative to the historical measure entropy.
- Subjects
MATHEMATICAL analysis; DYNAMICS; STOCHASTIC processes; NONLINEAR theories; ASSETS (Accounting); PRICING
- Publication
Finance & Stochastics, 2004, Vol 8, Issue 2, p229
- ISSN
0949-2984
- Publication type
Article
- DOI
10.1007/s00780-003-0112-5