A Characterization of Hedging Portfolios for Interest Rate Contingent Claims

Details A Characterization of Hedging Portfolios for Interest Rate Contingent Claims A Characterization of Hedging Portfolios for Interest Rate Contingent Claims

2004-07-08

arxiv.org/abs/math/0407119v1

Annals of Probability 2004, Vol. 14, No. 3, 1267-1294

Mathematics

Probability

Scientific paper

10.1214/105051604000000297

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.

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