Risk-minimizing option pricing under a Markov-modulated jump-diffusion model with stochastic volatility

In this paper, we deal with the pricing of European style options when the dynamics of the risky underlying asset are driven by a Markov-modulated jump diffusion with stochastic volatility. We investigate the Radon–Nikodym derivative for the minimal martingale measure and a partial differential equation approach for pricing European options. An optimal hedging strategy in terms of local risk minimization is obtained.