Applied Mathematics and Optimization, Vol.70, No.3, 511-537, 2014
On Mean-Variance Hedging of Bond Options with Stochastic Risk Premium Factor
We consider the mean-variance hedging problem for pricing bond options using the yield curve as the observation. The model considered contains infinite-dimensional noise sources with the stochastically- varying risk premium. Hence our model is incomplete. We consider mean-variance hedging under the real world measure and obtain an explicit form of the optimal hedging strategy.
Keywords:Mean-variance hedging;Indifference price;Kalman filter;Infinite-dimensional HMJ;Stochastic risk premium