Quadratic hedging methods for defaultable claims (Q2480782)

In a simple market consisting of the money market account and a risky asset, the authors compare the pricing and the hedging of a defaultable claim under the so-called intensity-based, local risk-minimization and mean-variance hedging approaches. For the first time in the literature, local risk-minimization is applied to defaultable derivatives, in particular for the case of a default put option with random recovery rate.