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Indifference Pricing in a Basis Risk Model with Stochastic Volatility

By Kwok-Chung Ivan Lam


The aim of this dissertation is to study exponential indifference pricing in a basis risk model of one tradable asset and one correlated non-tradable asset in which a claim on the non-tradable asset is hedged using the tradable asset. We extend this to incorporate stochastic volatilities for both assets, driven by a common stochastic factor, and look for the corresponding indifference price characterisation under such a model. We would also look at the optimal portfolio in hedging the claim on the non-tradable asset, the residual risk process and the payoff decomposition of the claim involving the indifference price process and a local martingale. Towards the end of the discussion, we would outline a procedure which one could use to obtain numerical results for the indifference price under this model

Topics: Mathematics education
Year: 2011
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