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 the minimal martingale measure, corresponding to the local risk …
