Hulley, Hardy; McWalter, Thomas A. - In: Journal of risk and financial management : JRFM 8 (2015) 1, pp. 83-102
This paper examines a simple basis risk model based on correlated geometric Brownian motions. We apply quadratic criteria to minimize basis risk and hedge in an optimal manner. Initially, we derive the Föllmer–Schweizer decomposition for a European claim. This allows pricing and hedging under...