Before revision: We develop a new method for hedging derivatives based on the premise that a hedger should not always rely on a universal set of trading instruments that are used to form a linear portfolio of the stock, riskless bond and standard derivatives, but rather should design a set of specific, most suited financial instruments for the hedging problem.
After revision: In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for hedging derivatives based on the premise that a hedger should not always rely on a universal set of trading instruments that are used to form a linear portfolio of the stock, riskless bond and standard derivatives, but rather should design a set of specific, most suited financial instruments for the hedging problem.