A numerical method for financial decision problems under stochastic volatility

In many financial decision problems, such as portfolio optimization or hedging, the goal is to compute an optimal investment strategy, in order to maximize expected utility or minimize expected risk. If the volatility of the risky asset(s) follows a stochastic process and is not observable, the problems usually do not have analytical solutions. Hence, we propose an efficient numerical method for these problems, based on a method developed recently for solving continuous-state partially observable Markov decision processes. Numerical applications are presented and discussed for a problem of hedging European put and call options.