MINIMAL VARIANCE HEDGING FOR INSIDER TRADING

Abstract

In this paper, we first study the problem of minimal hedging for an insider trader in incomplete markets. We use the forward integral in order to model the insider portfolio and consider a general larger filtration. We characterize the optimal strategy in terms of a martingale condition. In the second part we focus on a problem of mean-variance hedging where the insider tries to minimize the variance of his wealth at time T given that this wealth has a fixed expected value A. We solve this problem for an initial enlargement of filtration by providing an explicit solution.