Risk-Minimizing Hedging of General Cash Flows in Discrete Time
25 Pages Posted: 4 Mar 2002
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: Suggested Citation