Risk-Minimizing Hedging of General Cash Flows in Discrete Time

25 Pages Posted: 4 Mar 2002

See all articles by Lars Schiefner

Lars Schiefner

Martin Luther Universitat Halle Wittenberg

Abstract

This paper addresses the problem of replicating non-attainable cash flows. Foellmer and Sondermann 1986 introduced the concept of risk-minimization by using a global quadratic risk criterion for martingale price processes. A local risk-minimization problem without the restriction to martingales was solved by Foellmer and Schweizer in 1988. Both approaches consider contingent claims of European type. This paper shows in discrete time that both methods are also applicable for general cash ows which are necessary in the growing field of financial engineering.

Keywords: Risk-minimizing Hedging, General Cash Flows, Quadratic Risk

JEL Classification: G10, G13

Suggested Citation

Schiefner, Lars, Risk-Minimizing Hedging of General Cash Flows in Discrete Time. EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=302320 or http://dx.doi.org/10.2139/ssrn.302320

Lars Schiefner (Contact Author)

Martin Luther Universitat Halle Wittenberg ( email )

06099 Halle, Sachsen-Anhalt
Germany

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