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: | Caldentey Ren, Haugh Martin |
Keywords: | investment |
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.