Mean-variance hedging for interest rate models with stochastic volatility. (Q1862732)

This paper applies the mean-variance hedging approach to interest rate models in the presence of stochastic volatility. For a fixed number of bonds, an explicit formula for the density of the variance optimal measure is given. This measure is independent of the chosen times of maturity. The mean-variance hedging strategy for a caplet is computed and compared with the optimal strategy according to the local risk minimizing approach.