Valuation of Unhedgeable Risk

Thaleia Zariphopoulou
University of Texas
Mathematics

The valuation problem of derivatives written on non-traded assets is examined in a multi-security market setting. The pricing is done via utility methods and characterization results are derived involving distortions of solutions to linear pdes. This approach yields explicit formulae for the derivative prices as well as direct comparison results for the relevant prices in complete markets. The methodology is general enough to accomodate nonlinear price dynamics and stochastic volatility.


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