Hedging and valuing multi-asset options are analyzed using the Optimal Hedge Monte-Carlo method. The average cost of hedging and the residual risks are related to the stochastic description of the underlying assets, their dependence structure, and to the option contract details. A long position...

Digital default swaps are different from conventional (floating recovery) swaps because they transfer different types of risk. Conventional swaps transfer default loss risk, while digitals transfer default event risk. The implicit recovery risk remains unpriced in a hedged digital default swap....