Indifference pricing and hedging in stochastic volatility models

M. R. Grasselli; T. R. Hurd

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arxiv math/0404447 v1 pith:6GLXYTW7 submitted 2004-04-24 math.PR math.OCq-fin.PR

Indifference pricing and hedging in stochastic volatility models

M. R. Grasselli , T. R. Hurd This is my paper

classification math.PR math.OCq-fin.PR

keywords volatilitymodelshedgingindifferencepricepricingstochasticutility

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We apply the concepts of utility based pricing and hedging of derivatives in stochastic volatility markets and introduce a new class of "reciprocal affine" models for which the indifference price and optimal hedge portfolio for pure volatility claims are efficiently computable. We obtain a general formula for the market price of volatility risk in these models and calculate it explicitly for the case of an exponential utility.

Indifference pricing and hedging in stochastic volatility models

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