Derivative valuation in incomplete markets: from commodities to equity-linked insurance

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We are all prone to the risks embedded in the financial markets. On a world scale, these risks are becoming both more diversified and simultaneously more interlinked. One of the main reasons that the financial markets exist is so that individuals who do not wish to take on certain risk characteristics can trade them away in exchange for a risk profile they are comfortable with. Individual investors do this mostly by trading in stocks and bonds, or managed portfolios through mutual funds. However, the main forces which push the financial markets are welded by the sophisticated investment bankers. They produce ever more complex financial instruments to sate the appetite of risk seekers, hedgers and arbitragers - investors who speculate on risk, investors who wish to remove or balance risk, and investors who try to make (almost) for sure profits by offsetting one risk against another.