A New Set of Financial Instruments

Abootaleb Shirvani, Stoyan V. Stoyanov, Svetlozar T. Rachev, Frank J. Fabozzi

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


In complete markets there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for hedging derivatives assuming that a hedger should not always rely on trading existing assets that are used to form a linear portfolio comprised of the risky asset, the riskless asset, and standard derivatives, but rather should design a set of specific, most-suited financial instruments for the hedging problem. We introduce a sequence of new financial instruments best suited for hedging jump-diffusion and stochastic volatility market models. The new instruments we introduce are perpetual derivatives. More specifically, they are options with perpetual maturities. In a financial market where perpetual derivatives are introduced, there is a new set of partial and partial-integro differential equations for pricing derivatives. Our analysis demonstrates that the set of new financial instruments together with a risk measure called the tail-loss ratio measure defined by the new instrument’s return series can be potentially used as an early warning system for a market crash.

Original languageEnglish
Article number606812
JournalFrontiers in Applied Mathematics and Statistics
StatePublished - Nov 26 2020


  • Merton’s jump diffusion model
  • hedging
  • option pricing
  • stochastic volatility model
  • tail-loss ratio risk measure


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