" to the physical probability measure P, where closeness is measured in terms of relative entropy. In this paper, we … determine the minimal entropy martingale measure in a market where securities are traded with payoffs depending on two types of … these risks are independent under the entropy measure. Moreover, in such a market the entropy measure of the combined …

European claim. This allows pricing and hedging under the minimal martingale measure, corresponding to the local risk … pricing and hedging formulae for put and call options are derived in terms of the Black–Scholes formula. Due to market … an approximate hedging formula, which does not require knowledge of these parameters. The hedging strategies are tested …