Pricing and hedging in the presence of extraneous risks (Q885263)

The authors study the pricing and hedging of contingent claims whose payoffs are allowed to depend on the occurence of nonmarket events. They start from a general semimartingale model of complete markets and assume that there are extraneous risks, which are modeled by considering an observed filtration. In the presence of such risks markets are incomplete and perfect hedging is impossible. It is shown that the absence of arbitrage gives rise to a price interval whose endpoints correspond to the hedging prices of the claim. A set of necessary and sufficient conditions is provided for claims to be attainable.