Journées de Probabilités 2007

Peter Imkeller

Martingale optimality and cross hedging of insurance derivatives

A financial market model is considered on which agents (e.g. insurers) are subject to an exogenous financial risk, which they trade by issuing a risk bond. Typical risk sources are climate or weather. Buyers of the bond are able to invest in a market asset correlated with the exogenous risk. We investigate their utility maximization problem with respect to the correlation, and calculate bond prices using utility indifference. Prices are seen to decrease as a result of dynamic hedging. The increments are interpreted in terms of diversification pressure.