Indifference pricing with exponential utility
Consider a financial market model with the following elements: a riskless asset, the primary risky assets available for trade whose discounted price processes are described by a semimartingale \(S\), a suitable space of hedging strategies so that arbitrage opportunities are excluded, a contingent claim \(B\) and an exponential utility function with risk aversion parameter \(\alpha >0\). In this setting, one can define the utility indifference selling price \(p_{\alpha}(B)\) and, imposing mild conditions, on \(S\), guarantee the existence of a unique measure \(Q^*\) called the minimal entropy martingale measure. In this elegant short note, it is shown that if \(B\) satisfies some integrability conditions, then \(\lim_{\alpha \downarrow 0} p_{\alpha}(B) = E^{Q^*}(B)\), i.e., the minimal entropy martingale measure price of a contingent claim is the limit of the utility indifference price when the risk aversion parameter tends to \(0\). The result, proved by using the key duality equality of \textit{F. Delbaen, P. Grandits, T. Rheinländer, D. Samperi, M. Schweitzer} and \textit{C. Stricker} [Math. Finance 12, No. 2, 99--123 (2002; Zbl 1072.91019)], has also been derived by \textit{D. Becherer} [Insur. Math. Econ. 33, No. 1, 1--28 (2003; Zbl 1072.91025)] with a different approach that demands slightly stronger integrability conditions. In addition, an estimate of the rate of convergence is obtained. For the entire collection see [Zbl 1048.60002].
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