Within the optimal production and hedging decision framework, Lien compares the exponential utility function with its second order approximation under the normality distribution assumption. In this paper, we first extend the result further by comparing the exponential utility function with a 2n-order approximation for any integer n. We then propose an approach with illustration to find the smallest n that provides a good approximation.
|Number of pages||7|
|Journal||Journal of Mathematical Finance|
|Publication status||Published - Aug 2016|
- Exponential Utility Function
- Optimal Production
- 2n-Order Approximation