The paper presents an overview of methods of hedging defaultable derivatives under the assumption that there exist tradeable assets with dynamics allowing for elimination of default risk of derivative securities. We investigate hedging strategies in alternative frameworks with different degrees of generality, an abstract semimartingale framework and a more specific Markovian set-up, and we use ...

In this paper we assess the partial hedging problems by formulating hedging strategies that minimize conditional value-at-risk (CVaR) of the portfolio loss under stochastic interest rate environment. The combination of stochastic interest and CVaR hedging method makes the valuing approach more complex than the existing model with constant interest rate. We take up two issues in searching the op...

While most research on hedging has focused on foreign currency exposures, analysis of jet fuel price exposure in the airline industry and the effects of both financial and operational hedging on this exposure provides valuable insights into risk management. Exposure and hedging in the airline industry is relatively straightforward compared to foreign exchange hedging by multinationals. We inves...

W consider a firm that invests in capacity under demand uncertainty and thus faces two related but distinct types of risk: mismatch between capacity and demand and profit variability. Whereas mismatch risk can be mitigated with greater operational flexibility, profit variability can be reduced through financial hedging. We show that the relationship between these two risk mitigating strategies ...

We derive axiomatically a model in which the Decision Maker can exhibit simultaneously both the Allais and the Ellsberg paradoxes in the standard setup of Anscombe and Aumann (1963). Using the notion of ‘subjective’, or ‘outcome’ mixture of Ghirardato et al. (2003), we define a novel form of hedging for objective lotteries, and introduce a novel axiom which is a generalized form of preferences ...

We derive axiomatically a model in which the Decision Maker can exhibit simultaneously both the Allais and the Ellsberg paradoxes in the standard setup of Anscombe and Aumann (1963). Using the notion of ‘subjective’, or ‘outcome’ mixture of Ghirardato et al. (2003), we define a novel form of hedging for objective lotteries, and introduce a novel axiom which is a generalized form of preferences ...

In the Black-Cox model, a firm makes default when its value hits an exponential barrier. Here, we propose an hybrid model that generalizes this framework. The default intensity can take two different values and switches when the firm value crosses the barrier. Of course, the intensity level is higher below the barrier. We get an analytic formula for the Laplace transform of the default time and...

We present a closed-form ∆-hedging result for a large investor whose trades generate adverse market impact. Unlike in the complete-market case, the agent no longer finds it tenable to be perfectly hedged or even within a fixed distance away from being hedged. Instead, he may find himself arbitrarily mishedged and optimally trades towards the classical Black-Scholes ∆, with trading intensity pro...

Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Practitioners Abstract The optimal hedging model has become the standard theoretical model of normative hedging behavior due to its intuitive tradeoff of expected return with risk, its efficient use of information and its easy implementation...

Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. Practitioners Abstract The optimal hedging model has become the standard theoretical model of normative hedging behavior due to its intuitive tradeoff of expected return with risk, its efficient use of information and its easy implementation...