Abstract
In this paper, the problem of partial hedging is studied by constructing hedging strategies that minimize conditional value-at-risk (CVaR) of the portfolio. Two dual versions of the problem are considered: minimization of CVaR with the initial wealth bounded from above, and minimization of hedging costs subject to a CVaR constraint. The Neyman–Pearson lemma approach is used to deduce semi-explicit solutions. Our results are illustrated by constructing CVaR-efficient hedging strategies for a call option in the Black–Scholes model and also for an embedded call option in an equity-linked life insurance contract.
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