On the condition that both futures and options exist in the markets for hedging, this paper examines the optimal hedging strategy under price risk and background risk. Compared with the previous research, which has studied options hedging against basis risk and production risk being extended to options and futures hedging against price risk and background risk, we proposed a model and have take...

In this paper, we define hedge operation on a residuated skew lattice and investigate some its properties. We get relationships between some special sets as dense, nilpotent, idempotent, regular elements sets and their hedges.  By examples, we show that hedge of a dense element is not a dense and hedge of a regular element is not a regular. Also hedge of a nilpotent element is a nilpotent and h...

In portfolio optimization, the inverse covariance matrix prescribes the hedge trades where a portfolio of stocks hedges each one with all the other stocks to minimize portfolio risk. In practice with finite samples, however, multicollinearity makes the hedge trades too unstable to be reliable. By reducing the number of stocks in each hedge trade to curb estimation errors, we motivate a “sparse”...

The likelihood ratio method [BG96] provides a tool for the calculation of hedge ratios and risk parameters with Monte Carlo calculations. In this article, we present the extension of existing likelihood ratio methods to multiple underlyings and to higher order sensitivities such as the crossderivatives on the underlyings, and how the method can be used in a displaced diffusion [Rub83] framework...

In this paper, the financial engineering minimum risk-based portfolio hedging model is first analyzed. It is then followed by the investigation on various major estimation methods for the minimum risk hedge ratio. The results revealed in the current study show that the HR obtained by the ordinary least squares (OLS) model is maximal and the out-of-sample hedging performance is the best; however...

This paper explores the structure of optimal investment strategies using stochastic programming and duality theory in investment portfolios containing options for a hedge fund manager who attempts to beat a benchmark. Explicit optimal conditions for option investments are obtained for several models.

We develop a flexible simulation-based optimization (SBO) method for the construction of optimal portfolios including hedge funds and other types of alternative investments. This method takes into account the skew and kurtosis of asset returns, the time series structure of asset returns, and the asymmetric nature of investor preferences for gains versus losses. Johnson (1949) translation is use...

This research investigates the hedging effectiveness of stock index futures markets in Malaysia and Singapore by employing various hedge ratio estimation methods, which comprises of the conventional OLS model, VECM, EGARCH and bivariate GARCH. The empirical results indicate that the Kuala Lumpur Futures Index (KLFI) provides higher hedging effectiveness compared to the Straits Times Index (STI)...

What percentage of their portfolio should investors allocate to alternative investment vehicles? The only available answers to the above question are set in a static meanvariance framework, with no explicit accounting for uncertainty on the active manager’s ability to generate abnormal return. In this paper we consider the problem of an investor who can choose between the riskfree security and ...