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On pricing and hedging options in regime-switching models with feedback effect. (English) Zbl 1209.91156

The goal of the paper is to study the continuous time market consisting of two assets. One is modelling the bank account (B), second the risky asset (S). The authors assume that the dynamics of both the balance of B and price of S depend on finite state chain \(X\). Namely, \(X\) is influencing the interest rate of B and the coefficients of the diffusion process describing the price of S. Moreover the changes of states of \(X\) are inducing jumps of the price of S. On the other hand the price of S is modulating the intensity of the transition of \(X\) from one state to another.
For such a market as above one the authors discuss the pricing and hedging of European style options.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
60G48 Generalizations of martingales
60H30 Applications of stochastic analysis (to PDEs, etc.)
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