On Exponential Hedging and Related Quadratic Backward Stochastic Differential Equations

On Exponential Hedging and Related Quadratic Backward Stochastic Differential Equations The dual optimization problem for the exponential hedging problem is addressed with a cone constraint. Without boundedness conditions on the terminal payoff and the drift of the Ito-type controlled process, the backward stochastic differential equation, which has a quadratic growth term in the drift, is derived as a necessary and sufficient condition for optimality via a variational method and dynamic programming. Further, solvable situations are given, in which the value and the optimizer are expressed in closed forms with the help of the Clark-Haussmann-Ocone formula. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematics and Optimization Springer Journals

On Exponential Hedging and Related Quadratic Backward Stochastic Differential Equations

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Publisher
Springer-Verlag
Copyright
Copyright © 2006 by Springer
Subject
Mathematics; Systems Theory, Control; Calculus of Variations and Optimal Control; Optimization; Mathematical and Computational Physics; Mathematical Methods in Physics; Numerical and Computational Methods
ISSN
0095-4616
eISSN
1432-0606
D.O.I.
10.1007/s00245-006-0855-4
Publisher site
See Article on Publisher Site

Abstract

The dual optimization problem for the exponential hedging problem is addressed with a cone constraint. Without boundedness conditions on the terminal payoff and the drift of the Ito-type controlled process, the backward stochastic differential equation, which has a quadratic growth term in the drift, is derived as a necessary and sufficient condition for optimality via a variational method and dynamic programming. Further, solvable situations are given, in which the value and the optimizer are expressed in closed forms with the help of the Clark-Haussmann-Ocone formula.

Journal

Applied Mathematics and OptimizationSpringer Journals

Published: Sep 1, 2006

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