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Author: Abraham Lioui
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper derives optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of either a CARA or a logarithmic utility function. Existing futures contracts are not numerous enough to complete the market. In addition, in the case of CARA, the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical to those that would be derived if the constraint were ignored. Fictitiously completing the market, we can characterize the optimal hedging demands for futures contracts. Closed-form solutions exist in the logarithmic case, but not in the CARA case, since then a put (insurance) written on his wealth is implicitly bought by the investor. Although solutions are formally similar to those which obtain under complete markets, incompleteness leads in fact to second best optima.
Author: Abraham Lioui
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This paper derives optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of either a CARA or a logarithmic utility function. Existing futures contracts are not numerous enough to complete the market. In addition, in the case of CARA, the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical to those that would be derived if the constraint were ignored. Fictitiously completing the market, we can characterize the optimal hedging demands for futures contracts. Closed-form solutions exist in the logarithmic case, but not in the CARA case, since then a put (insurance) written on his wealth is implicitly bought by the investor. Although solutions are formally similar to those which obtain under complete markets, incompleteness leads in fact to second best optima.
Author: Suleyman Basak
Publisher:
ISBN:
Category : Financial futures
Languages : en
Pages : 0
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Book Description
Despite much work on hedging in incomplete markets, the literature still lacks tractable dynamic hedges in plausible environments. In this article, we provide a simple solution to this problem in a general incomplete-market economy in which a hedger, guided by the traditional minimum-variance criterion, aims at reducing the risk of a non-tradable asset or a contingent claim. We derive fully analytical optimal hedges and demonstrate that they can easily be computed in various stochastic environments. Our dynamic hedges preserve the simple structure of complete-market perfect hedges and are in terms of generalized "Greeks," familiar in risk management applications, as well as retaining the intuitive features of their static counterparts. We obtain our time-consistent hedges by dynamic programming, while the extant literature characterizes either static or myopic hedges, or dynamic ones that minimize the variance criterion at an initial date and from which the hedger may deviate unless she can pre-commit to follow them. We apply our results to the discrete hedging problem of derivatives when trading occurs infrequently. We determine the corresponding optimal hedge and replicating portfolio value, and show that they have structure similar to their complete-market counterparts and reduce to generalized Black-Scholes expressions when specialized to the Black-Scholes setting. We also generalize our results to richer settings to study dynamic hedging with Poisson jumps, stochastic correlation and portfolio management with benchmarking.
Author: Abraham Lioui
Publisher: Springer Science & Business Media
ISBN: 038724106X
Category : Business & Economics
Languages : en
Pages : 268
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Book Description
This book is an advanced text on the theory of forward and futures markets which aims at providing readers with a comprehensive knowledge of how prices are established and evolve in time, what optimal strategies one can expect the participants to follow, whether they pertain to arbitrage, speculation or hedging, what characterizes such markets and what major theoretical and practical differences distinguish futures from forward contracts. It should be of interest to students (MBAs majoring in finance with quantitative skills and PhDs in finance and financial economics), academics (both theoreticians and empiricists), practitioners, and regulators. Standard textbooks dealing with forward and futures markets generally focus on the description of the contracts, institutional details, and the effective (as opposed to theoretically optimal) use of these instruments by practitioners. The theoretical analysis is often reduced to the (undoubtedly important) cash-and-carry relationship and the computation of the simple, static, minimum variance hedge ratio. This book proposes an alternative approach of these markets from the perspective of dynamic asset allocation and asset pricing theory within an inter-temporal framework that is in line with what has been done many years ago for options markets.
Author: Constantin Mellios
Publisher:
ISBN:
Category :
Languages : en
Pages : 24
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Book Description
We focus in this article on the impact of the convenience yield on optimal hedging in a futures market. Our investor can freely negotiate the underlying spot commodity and trade in the bond market. We undertake our study in a setting where the three state variables, namely the convenience yield, the spot price and interest rates, as well as the market price of risk evolve randomly over time. We achieve various decompositions of optimal demands to highlight the particular role of each investment instruments regarding the optimal hedge. Despite the thorough description of the risks of the economy, we obtain closed-form solutions, which further facilitate the assessment of the behavior of our investor.
Author: Akash Deep
Publisher:
ISBN:
Category : Futures
Languages : en
Pages : 40
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Book Description
Author: Su Dai
Publisher: GRIN Verlag
ISBN: 3656539219
Category : Business & Economics
Languages : en
Pages : 80
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Book Description
Master's Thesis from the year 2013 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,7, University of Mannheim, language: English, abstract: The commodity futures contract is an agreement to deliver a specific amount of commodity at a future time . There are usually choices of deliverable grades, delivery locations and delivery dates. Hedging belongs to one of the fundamental functions of futures market. Futures can be used to help producers and buyers protect themselves from price risk arising from many factors. For instance, in crude oil commodities, price risk occurs due to disrupted oil supply as a consequence of political issues, increasing of demand in emerging markets, turnaround in energy policy from the fossil fuel to the solar and efficient energy, etc. By hedging with futures, producers and users can set the prices they will receive or pay within a fixed range. A hedger takes a short position if he/she sells futures contracts while owning the underlying commodity to be delivered; a long position if he/she purchases futures contracts. The commonly known basis is defined as the difference between the futures and spot prices, which is mostly time-varying and mean-reverting. Due to such basis risk, a naïve hedging (equal and opposite) is unlikely to be effective. With the popularity of commodity futures, how to determine and implement the optimal hedging strategy has become an important issue in the field of risk management. Hedging strategies have been intensively studied since the 1960s. One of the most popular approaches to hedging is to quantify risk as variance, known as minimum-variance (MV) hedging. This hedging strategy is based on Markowitz portfolio theory, resting on the result that “a weighted portfolio of two assets will have a variance lower than the weighted average variance of the two individual assets, as long as the two assets are not perfectly and positively correlated.” MV strategy is quite well accepted, however, it ignores the expected return of the hedged portfolio and the risk preference of investors. Other hedging models with different objective functions have been studied intensively in hedging literature. Due to the conceptual simplicity, the value at risk (VaR) and conditional value at risk (C)VaR have been adopted as the hedging risk objective function. [...]
Author: Darrell Duffie
Publisher:
ISBN:
Category : Hedging (Finance)
Languages : en
Pages : 17
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Book Description
Author: Avraham Kamara
Publisher:
ISBN:
Category : Hedging (Finance)
Languages : en
Pages : 50
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Author: Sally Shen
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
We develop a robust optimal dynamic hedging strategy that takes both downside risks and market incompleteness into account for an agent who fears model misspecification. The robust agent is assumed to minimize the shortfall between the assets and liabilities under an endogenous worst case scenario by means of solving a min-max robust optimization problem. When the funding ratio is low, robustness reduces the demand for risky assets. However, cherishing the hope of covering the liabilities, a substantial risk exposure is still optimal. A longer investment horizon or a higher funding ratio weakens the investor's fear of model misspecification. If the expected equity return is overestimated, the initial capital requirement for hedging can be decreased by following the robust strategy.
Author: ANTHONY TUCK-KWAI CHAN
Publisher:
ISBN:
Category : Financial futures
Languages : en
Pages : 402
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Book Description
Treasury bills futures market are chosen for the purpose of empirical study.
