Open AccessHedging in bond markets by the Clark-Ocone formula
Author(s) -
Nicolas Privault,
Timothy Robin Y. Teng
Publication year - 2014
Publication title -
communications on stochastic analysis
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.224
H-Index - 10
eISSN - 2688-6669
pISSN - 0973-9599
DOI - 10.31390/cosa.8.2.08
Subject(s) - bond , economics , bond market , financial economics , financial market , mathematical economics , financial system , finance
Hedging strategies in bond markets are computed by martingale representation and the Clark-Ocone formula under the choice of a suitable of numeraire, in a model driven by the dynamics of bond prices. Applications are given to the hedging of swaptions and other interest rate derivatives, and our approach is compared to delta hedging when the underlying swap rate is modeled by a diffusion process.
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