Halperin, Igor; Itkin, Andrey - In: Quantitative Finance 14 (2014) 3, pp. 427-442
This work addresses the problem of optimal pricing and hedging of a European option on an illiquid asset Z using two proxies: a liquid asset S and a liquid European option on another liquid asset Y. We assume that the S-hedge is dynamic while the Y-hedge is static. Using the indifference pricing...