Frequently, dynamic hedging strategies minimizing risk exposure are not given in closed form, but need to be approximated numerically. This makes it difficult to estimate residual hedging risk, also called basis risk, when only imperfect hedging instruments are at hand. We propose an easy to...

We prove explicit error bounds for Markov chain Monte Carlo (MCMC) methods to compute expectations of functions with unbounded stationary variance. We assume that there is a p∈(1,2) so that the functions have finite Lp-norm. For uniformly ergodic Markov chains we obtain error bounds with the...

We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity...