Risk indifference pricing of functional claims of the yield surface in the presence of partial information

Abstract

In this paper we study the problem of risk indifference pricing of interest rate claims which are functionals of a bond yield surface under partial information. Our approach to solve this problem relies on a maximum principle for partial information control of stochastic differential games based on generalized bond portfolios. The latter method enables us to establish an explicit representation of the risk indifference price of such claims. Received 2010-12-17; Communicated by A. Millet. 2000 Mathematics Subject Classification. Primary: 31C25, 91B16, 60H15; Secondary: 93E20, 35R60.