Publication

Dual optimization problem on defaultable claims

Stephane GOUTTE, Armand NGOUPEYOU

We study the pricing and hedging problem of a claim ? 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 ? 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.

Publication type: 
Scientific Article
Date de parution: 
01/2014
Support: 
Mathematical Economics Letters