On the mean-variance hedging in the Ho–Lee diffusion model

On a standard stochastic basis $(\Omega, \mathscr{F}, \mathbb{F}, \mathsf{P})$, we consider a diffusion analogue of the model of interest rates proposed first by Ho and Lee in [ J. Finance, XLI (1986), pp. 1011–1029] for a binomial model. The paper gives a solution of a problem of the mean-variance hedging for an arbitrary contingent claim $H\in\mathscr{L}_2(\mathscr{F}_T,\mathsf{P})$ with expire time $T$. It is shown that the solution proposed is valid for the case where the expire time of a bond, in which means are invested, changes predictably.