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.
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