Optimization problem and mean variance hedging on defaultable claims
arXiv:1209.5953
Abstract
We study the pricing and the hedging of claim ψ which depends on the default times of two firms A and B. In fact, we assume that, in the market, we can not buy or sell any defaultable bond of the firm B but we can only trade defaultable bond of the firm A. Our aim is then to find the best price and hedging of ψ using only bond of the firm A. Hence, we solve this problem in two cases: firstly in a Markov framework using indifference price and solving a system of Hamilton-Jacobi-Bellman equations, secondly, in a more general framework, using the mean variance hedging approach and solving backward stochastic differential equations (BSDE).
34 pages