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By Kwok-Chung Ivan, Lam

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Although it is a common practice to look at exponential utility due to its ability to simplify problem in computing indifference price, it is worth noting that using such utility function removes the initial wealth dependence from the indifference price that is a desirable feature to have. As a result, it would be a good idea to consider power utility, but one can imagine the computational complexity that arose when we are considering a 4 dimensional indifference price. Also, the use of power utility in the maximization problem might pose difficulties in pricing short position claims.

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Indifference Pricing in a Basis Risk Model with Stochastic Volatility by Kwok-Chung Ivan, Lam


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