The Black-Scholesmodelis basedona one-parameter pricingkernel with constantelasticity. Theoretical and empirical results suggest declining elasticity and, hence, a pricing kernel withat leasttwo parameters.We price European-style optionson assets whose probability distributions have two unknown...

In both complete and incomplete markets we consider the problem of fulfilling a financial obligation xc as well as possible at time T if the initial capital is not sufficient to hedge xc. This introduces a new risk into the market and our main aim is to minimize this shortfall risk by making use...