Rational hedging and valuation of integrated risks under constant absolute risk aversion. (Q1413332)

Financial products that incorporate financial and actuarial risks are becoming more and more important. Examples are equity linked life insurance, credit and default securities or weather derivatives. Here these risk processes are described by semimartingales. Since the financial part of the risk can be traded and hedged while the residual actuarial part cannot, the natural setting is that of an incomplete market. These rather general risks are evaluated by means of the rather special constant risk aversion exponential utility functions. The main reason for this is to utilize duality results on exponential utility optimization of \textit{F. Delbaen} et al. [Math. Finance 12, 99--123 (2002; Zbl 1072.91019)]. This does not only yield price ranges of risks or hedging strategies but has many other desirable properties. More precise bounds and diversification results can be obtained for semicomplete product models. These consist of a complete market section and an independent actuarial part.