Optimal control and hedging of operations in the presence of financial markets

Optimal control and hedging of operations in the presence of financial markets

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Article ID: iaor200928577
Country: United States
Volume: 31
Issue: 2
Start Page Number: 285
End Page Number: 304
Publication Date: May 2006
Journal: Mathematics of Operations Research
Authors: ,
Keywords: investment
Abstract:

We consider the problem of dynamically hedging the profits of a corporation when these profits are correlated with returns in the financial markets. In particular, we consider the general problem of simultaneously optimizing over both the operating policy and the hedging strategy of the corporation. We discuss how different informational assumptions give rise to different types of hedging and solution techniques. Finally, we solve some problems commonly encountered in operations management to demonstrate the methodology.

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