An Alternative Forward Measure Approach to Hedging Defaultable Contingent Claims

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}.