Malliavin calculus in construction of hedging portfolio for the Heston model of a financial market (Q2732368)

Optimal replicating portfolio is constructed for the Heston model of financial market, in a mathematical framework proposed by \textit{I. Karatzas} and \textit{S. E. Shreve} [``Methods of mathematical finance'' (1998; Zbl 0941.91032)]. The stochastic Heston model is defined by an appropriate system of Itô type stochastic differential equations. A method of theoretical and numerical construction of the hedging (replicating) portfolio for a given derivative financial instrument for the Heston model of a financial market is presented. This approach applies also to the derivation of useful formulae describing optimal portfolio process in some stochastic optimization problems playing an important role in mathematical finance. A methodology based on an application of the Clark-Ocone-Haussmann formula is used. Quantitatively replicating portfolios for the Black-Scholes and Heston models are compared, using the approximate computer algorithms based on the calculation of the Malliavin derivatives of appropriate stochastic processes and the application of the Monte Carlo simulation techniques.