The hedging problem for insiders is very important in the financial market.The locally risk minimizing hedging was adopted to solve this problem.Since the market was incomplete,the minimal martingale measure was chosen as the equivalent martingale measure.By the F-S decomposition,the expression of the locally risk minimizing strategy was presented.Finally,the local risk minimization was applied to index tracking and its relationship with tracking error variance (TEV)-minimizing strategy was obtained.
