Optimal design of derivatives in illiquid markets: an alternative approach

In this paper we determine the optimal structure of derivatives written on an illiquid asset, such as an energy event or a weather event. This transaction involves two agents: a ``bank'' which wants to create and sell a claim contingent to the illiquid asset and aims minimise its shortfall risk, and an ``investor'' which may buy this claim and aims at maximise its expected utility, possibly investing his residual wealth in a financial market. In the case when the utility and the loss functions are exponential, we characterise the structure and the price of the optimal derivative asset.