Overview of utility-based valuation

TL;DR

This paper reviews utility-based valuation methods for pricing derivatives in incomplete markets, focusing on practical computation of marginal utility-based prices through first-order expansions relative to small random endowments.

Contribution

It introduces a practical approach for utility-based pricing by computing first-order expansions of marginal utility-based prices in incomplete markets.

Findings

Provides a method for practical utility-based pricing.

Details first-order expansion techniques for marginal utility prices.

Addresses pricing in incomplete markets.

Abstract

We review the utility-based valuation method for pricing derivative securities in incomplete markets. In particular, we review the practical approach to the utility-based pricing by the means of computing the first order expansion of marginal utility-based prices with respect to a small number of random endowments.