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Hedging of defaultable claims in a structural model using a locally risk-minimizing approach. (English) Zbl 1348.60067

Summary: In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer-Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral.

MSC:

60G48 Generalizations of martingales
60G51 Processes with independent increments; Lévy processes
91G80 Financial applications of other theories
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