Dynamic hedging in incomplete markets: a simple solution

Despite much work on hedging in incomplete markets, the literature still lacks tractable dynamic hedges in plausible environments, in this article, Professor Suleyman Basak and Dr Georgy Chabakauri provide a simple solution to this problem.

The simple solution to this problem, provided in the paper, is in a general incomplete-market economy in which a hedger, guided by the traditional minimum-variance criterion, aims at reducing the risk of a non-tradable asset or a contingent claim.

They derive fully analytical optimal hedges and demonstrate that they can easily be computed in various stochastic environments.

To access the article click below

Dynamic Hedging