On the Mean-Variance Hedging in the Ho--Lee Diffusion Model

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On a standard stochastic basis $(\Omega ,{\cal F},{\mathbb F}$,{\bf P}), we consider a diffusion analogue of the model of interest rates proposed first by Ho and Lee in [ J. Finance, XLI (1986), pp. 1011--1029] for a binomial model. The paper gives a solution of a problem of the mean-variance hedging for an arbitrary contingent claim $H\in {\cal L}_2({\cal F}_T,${\bf P}) with expire time~T. It is shown that the solution proposed is valid for the case where the expire time of a bond, in which means are invested, changes predictably.