This paper presents a PDE approach in a Markovian setting to hedge defaultable derivatives. The arbitrage price and the hedging strategy for an attainable contingent claim are described in terms of solutions of a pair of coupled PDEs. For some standard examples of defaultable claims, we provide explicit formulae for prices and hedging strategies.
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Document Type: Research Article
Department of Applied Mathematics, Illinois Institute of Technology, Chicago, IL 60616, USA
Département de Mathématiques, Université d'Évry Val d'Essonne, 91025 Évry Cedex, France
Faculty of Mathematics and Information Science, Warsaw University of Technology, 00-661 Warszawa, Poland
Publication date: 2005-06-01