In the context of a locally risk-minimizing approach, the problem of hedging defaultable claims and their Föllmer-Schweizer decompositions are discussed in a structural model. This is done when the underlying process is a finite variation Lévy process and the claims pay a predetermined payout at maturity, contingent on no prior default. More precisely, in this particular framework, the locally risk-minimizing approach is carried out when the underlying process has jumps, the derivative is linked to a default event, and the probability measure is not necessarily risk-neutral. © 2014 Published by Elsevier B.V. All rights reserved.
Okhrati, R., Balbás, A., & Garrido, J. (2014). Hedging of defaultable claims in a structural model using a locally risk-minimizing approach. Stochastic Processes and Their Applications, 124(9), 2868–2891. https://doi.org/10.1016/j.spa.2014.04.001