Pricing and hedging in incomplete financial markets

The research project will develop mathematical models and computational techniques for risk management as well as pricing and hedging of financial instrument in incomplete financial markets. The primary focus will be on applications to the newly created derivatives on over-night lending rates that will replace the LIBOR rates as underlying risk factors for interest rate derivatives. These market sectors exhibit significant incompleteness which invalidates the more traditional replication arguments. The modelling part will involve the development of statistical models for the underlying risk factors while the risk management and pricing part will build on the techniques of convex optimisation.