Optimal derivatives design under dynamic risk measures

Barrieu, PaulineORCID logo; and El Karoui, Nicole (2004) Optimal derivatives design under dynamic risk measures. In: Mathematics of Finance. Contemporary mathematics (351). American Mathematical Society, Providence, USA, pp. 13-26. ISBN 9780821834121
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We develop a methodology to optimally design a financial issue to hedge non-tradable risk on financial markets. Economic agents assess their risk using monetary risk measure. The inf-convolution of convex risk measures is the key transformation in solving this optimization problem. When agents' risk measures only di#er from a risk aversion coe#cient, the optimal risk transfer is amazingly equal to a proportion of the initial risk.

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