Follmer, H. and Schweizer, M. (1991) Hedging of Contingent Claims under Incomplete Information. In: Davis, M.H.A. and Elliott, R.J., Eds., Applied Stochastic Analysis (Stochastics Monographs), Vol. 5, Gordon and Breach, London/ New York, 38.

has been cited by the following article:

• TITLE: Intrinsic Prices of Risk

  AUTHORS: Truc Le

  KEYWORDS: Implied Volatility, Convexity Adjustment, Primary and Parallel Markets, Incomplete Markets, Intrinsic Risk, Risk-Neutral Measure, Risk-Subjective Measure, Fair Valuation, Delta-Hedging

  JOURNAL NAME: Journal of Mathematical Finance, Vol.4 No.5, November 19, 2014

  ABSTRACT: We review the nature of some well-known phenomena such as volatility smiles, convexity adjustments and parallel derivative markets. We propose that the market is incomplete and postulate the existence of intrinsic risks in every contingent claim as a basis for understanding these phenomena. In a continuous time framework, we bring together the notion of intrinsic risk and the theory of change of measures to derive a probability measure, namely risk-subjective measure, for evaluating contingent claims. This paper is a modest attempt to prove that measure of intrinsic risk is a crucial ingredient for explaining these phenomena, and in consequence proposes a new approach to pricing and hedging financial derivatives. By adapting theoretical knowledge to practical applications, we show that our approach is consistent and robust, compared with the standard risk-neutral approach.