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. We introduce a sequence of new financial instruments best suited for hedging in jump-diffusion and stochastic volatility market models and those with long-range dependence. Our methods lead to a new set of partial and partial and partial-integro differential equations for pricing derivatives  .
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 assuming that a hedger should not always rely on trading existing assets that are used to form a linear portfolio comprised of the risky asset, the riskless asset, and standard derivatives, but rather should design a set of specific, most-suited financial instruments for the hedging problem. We introduce a sequence of new financial instruments best suited for hedging jump-diffusion and stochastic volatility market models . The new instruments we introduce are perpetual derivatives. More specifically, they are options with perpetual maturities. In a financial market where perpetual derivatives are introduced, there is a new set of partial and partial-integro differential equations for pricing derivatives . Our analysis demonstrates that the set of new financial instruments together with a risk measure called the tail-loss ratio measure defined by the new instrument's return series can be potentially used as an early warning system for a market crash .
R
We develop a
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
R
based on the premise
assuming
R
a universal set of trading instruments
trading existing assets
R
of the stock, riskless bond
comprised of the risky asset, the riskless asset,
R
most suited
most-suited
D
in
R
and those with long-range dependence. Our methods lead to a
. The new instruments we introduce are perpetual derivatives. More specifically, they are options with perpetual maturities. In a financial market where perpetual derivatives are introduced, there is a
D
partial and
A
. Our analysis demonstrates that the set of new financial instruments together with a risk measure called the tail-loss ratio measure defined by the new instrument's return series can be potentially used as an early warning system for a market crash