Indifference pricing and hedging in stochastic volatility models

M. R. Grasselli; T. R. Hurd

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Indifference pricing and hedging in stochastic volatility models

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

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

classification math.PRmath.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.

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