Exponential Hedging and Entropic Penalties

@article{Delbaen2002ExponentialHA,
  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},
  year={2002},
  volume={12}
}
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… 
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