Exponential Hedging and Entropic Penalties

  title={Exponential Hedging and Entropic Penalties},
  author={Freddy Delbaen and Peter Grandits and Thorsten Rheinl{\"a}nder and Dominick Samperi and Martin Schweizer and Ch. Stricker},
  journal={Mathematical Finance},
We solve the problem of hedging a contingent claim B by maximizing the expected exponential utility of terminal net wealth for a locally bounded semimartingale X. We prove a duality relation between this problem and a dual problem for local martingale measures Q for X where we either minimize relative entropy minus a correction term involving B or maximize the Q‐price of B subject to an entropic penalty term. Our result is robust in the sense that it holds for several choices of the space of… 
We discuss the problem of exponential hedging in the presence of model uncertainty expressed by a set of probability measures. This is a robust utility maximization problem with a contingent claim.
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  • S. Pliska
  • Economics, Mathematics
    Math. Oper. Res.
  • 1986
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