An Alternative Forward Measure Approach to Hedging Defaultable Contingent Claims

  • Gaoxiu Qiao The School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan Province, P. R. China
  • Xiaobin Li Department of Mathematics, Southwestern Jiaotong University Chengdu

Abstract

In this paper, we present a \emph{forward measure approach} to hedge defaultable contingent claims under stochastic interest rates. The relation of hedging strategies between the risk neutral measure and forward measure is deduced. Under the invariance martingale property and reduced-form model for default risk, to hedge a defaultable contingent claim depending on the forward price, one has to invest the same amount of this contingent claim value in the defaultable zero-coupon, and use defaultfree zero-coupon bond to hedge interest risk which extends the result of Blanchet-Scalliet, Jeanblane\cite{BSJ}.

Author Biographies

Gaoxiu Qiao, The School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan Province, P. R. China
The School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan
Province, P. R. China

Xiaobin Li, Department of Mathematics, Southwestern Jiaotong University Chengdu
Department of Mathematics
Published
2012-12-12
How to Cite
Qiao, G., & Li, X. (2012). An Alternative Forward Measure Approach to Hedging Defaultable Contingent Claims. European Journal of Mathematical Sciences, 1(1), 120-130. Retrieved from http://ejmathsci.org/index.php/ejmathsci/article/view/67
Section
Articles