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Abstract
We study a hedging problem in a market where traders have various levels of information. The exclusive information available only to informed traders is modelled by a diffusion process rather than discrete arrivals of new information. The asset price follows a jump–diffusion process and an information process affects jump sizes of the asset price. We find the local risk minimization hedging strategy of informed traders. Numerical examples as well as their comparison with the Black–Scholes strategy are provided via Monte Carlo.
Acknowledgement
We thank the anonymous referees for their comments and suggestions.
Notes
1. E-mail: [email protected]
Additional information
Funding
Wanmo Kang's work was partially supported by the National Research Foundation of Korea (NRF) grant funded by the Korea government (MEST) [grant number 2009-0068043]. Kiseop Lee's work is partially supported by WCU (World Class University) program through the National Research Foundation of Korea funded by the Ministry of Education, Science and Technology [grant number R31-20007].