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In this paper, we introduce an incomplete-market dynamic investment model with a correlated background risk. In so doing, we show the impact of background risk on the investment decisions.
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In this paper, we examine the interaction among the investment, production and hedging decisions. In so doing, we provide simple formulas that enable the firm, at any point in time, to quantify the impact of one decision on another and thus modify its strategy accordingly.
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-continuous viscosity solutions to the portfolio model. …
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