Insuring against the shortfall risk associated with real options
نویسنده
چکیده
Abstract: Given two assets Sand B with price processes two correlated geometric Brownian motions S. = (Stk::o, B. = (Sdt~o and a bond B. Suppose that we can only observe B. and can only trade in B. and B or equivalently buy options on B. at time T = O. Suppose further that we want to hedge an arbitrary binary option H depending on ST; i.e. H = l{sTEA}' Under these conditions it is shown that the best action we can take to minimize the shortfall probability is to buy a binary option if depending on BT. Especially the cases H = l{sTc} are considered.
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