A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

Details A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk A Multidimensional Exponential Utility Indifference Pricing Model with Applications to Counterparty Risk

2011-11-16

arxiv.org/abs/1111.3856v2

Economy

Quantitative Finance

Pricing of Securities

31 pages, 8 figures

Scientific paper

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model and provides two approximations for the utility indifference price: a linear approximation by Picard iteration and a semigroup approximation by splitting techniques. The key tool is the probabilistic representation for the utility indifference price by the solution of fully coupled linear forward-backward stochastic differential equations. We apply our methodology to study the counterparty risk of derivatives in incomplete markets.

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