Serving the Quantitative Finance Community
Risk-adjusted vs. Real-world Evolution
I have read numerous articles on hedging and risk management that says one should use real-world evolution to evaluate hedge effectiveness of minimum guaranteed insurance contracts, which is essentially a put option sold to policyholders. If the pricing of the premium is based on risk-neutral pricing, then why does hedging done under real-world?Is it because market is incomplete for these usually very long-dated options?