Robust one-period option hedging

Robust one-period option hedging

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Article ID: iaor20081355
Country: United States
Volume: 54
Issue: 6
Start Page Number: 1051
End Page Number: 1062
Publication Date: Nov 2006
Journal: Operations Research
Authors: , ,
Keywords: investment
Abstract:

We consider robust optimization to cope with uncertainty about the stock return process in one-period option hedging problems. The robust approach relates portfolio choice to uncertainty, making more cautious hedges when uncertainty is high. We represent uncertainty by a set of plausible expected returns of the underlying stocks and show that for this set the robust problem is a second-order cone program that can be solved efficiently. We apply the approach to find an optimal portfolio to hedge an index option.

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