Abstract
The problem of mean-variance hedging by continuous trading of futures contracts is discussed under stochastic interest-rate setting. In this situation, a hedger owes not only the risk caused by the randomness of a payoff but also the risk caused by random interest-rate, and tries to control both of them by futures trading. Therefore, the so-called “projection method” cannot be directly applied. By using the measure-change-technique via Feynman-Kac's formula, which Davis has suggested (1998), we shall observe that the problem can be modified to apply “the projection method” and the L 2-optimal strategies shall be obtained. Further, we will compute mean-variance-efficient strategies and frontiers; simple expressions are obtained even in our stochastic-interest-rate setting, and the impact of “random interest-rate risk”is clarified
Published Version
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