The Annals of Applied Probability

A characterization of hedging portfolios for interest rate contingent claims

Rene Carmona and Michael Tehranchi

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We consider the problem of hedging a European interest rate contingent claim with a portfolio of zero-coupon bonds and show that an HJM type Markovian model driven by an infinite number of sources of randomness does not have some of the shortcomings found in the classical finite-factor models. Indeed, under natural conditions on the model, we find that there exists a unique hedging strategy, and that this strategy has the desirable property that at all times it consists of bonds with maturities that are less than or equal to the longest maturity of the bonds underlying the claim.

Article information

Ann. Appl. Probab., Volume 14, Number 3 (2004), 1267-1294.

First available in Project Euclid: 13 July 2004

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Zentralblatt MATH identifier

Primary: 60H35: Computational methods for stochastic equations [See also 65C30]
Secondary: 60H07: Stochastic calculus of variations and the Malliavin calculus 91B28

Fixed income markets Malliavin calculus infinite-dimensional processes hedging portfolios


Carmona, Rene; Tehranchi, Michael. A characterization of hedging portfolios for interest rate contingent claims. Ann. Appl. Probab. 14 (2004), no. 3, 1267--1294. doi:10.1214/105051604000000297.

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