Variance optimal hedging for continuous time additive processes and applications

TL;DR

This paper derives explicit hedging strategies for vanilla options when the underlying follows an exponential additive process, enabling efficient mean variance hedging with applications to electricity markets.

Contribution

It provides a novel explicit Föllmer-Schweizer decomposition for additive process models, facilitating practical hedging solutions.

Findings

Explicit formulas for hedging strategies in additive process models

Efficient algorithms for mean variance hedging

Successful application to electricity market models

Abstract

For a large class of vanilla contingent claims, we establish an explicit F\"ollmer-Schweizer decomposition when the underlying is an exponential of an additive process. This allows to provide an efficient algorithm for solving the mean variance hedging problem. Applications to models derived from the electricity market are performed.