We develop an integrated simulation and optimization framework for multicurrency asset allocation problems. The simulation applies principal component analysis to generate scenarios depicting the discrete joint distributions of uncertain asset returns and exchange rates. We then develop and implement models that optimize the conditional-value-at-risk (CVaR) metric. The scenario-based optimizati...

Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for 4 years on four crops, we examine the role of habit, demographics, farm characteristics, and information sources on the hedging decision...

Allowing CEOs to hedge the risk in the compensation contracts their …rms give them has been controversial because such hedging permits the executives to undo some of the incentive e¤ects of those contracts; it also results in a divergence between the compensation …rms pay their senior executives and the compensation those executives e¤ectively receive. We analyze the personal hedging activities...

We show that the recent results on the Fundamental Theorem of Asset Pricing and the super-hedging theorem in the context of model uncertainty can be extended to the case in which the options available for static hedging (hedging options) are quoted with bid-ask spreads. In this set-up, we need to work with the notion of robust no-arbitrage which turns out to be equivalent to no-arbitrage under ...

We consider the problem of hedging the loss of a given portfolio of derivatives using a set of more liquid derivative instruments. We illustrate why the typical mathematical formulation for this hedging problem is ill-posed. We propose to determine a hedging portfolio by minimizing a proportional cost subject to an upper bound on the hedge risk; this bound is typically slightly larger than the ...

This paper introduces a financial hedging model for global environment risks. Our approach is based on portfolio insurance under hedging constraints. Investors are assumed to maximize their expected utilities defined on financial and environmental asset values. The optimal investment is determined for quite general utility functions and hedging constraints. In particular, our results suggest ho...

Drought is an inevitable part of the world’s climate. It occurs in wet as well as in dry regions. Therefore, planning for drought and mitigating its impacts is essential. In this study, a hedging rule is developed using the zero/one mixed integer-programming approach. Furthermore, some procedures are introduced to ease the computational burden inherent in integer programming. Hedging rules are ...

For index-based hedging design, the scatter plot of the hedging contract losses versus the losses to be hedged is generally used to visualize and quantify basis risk. While studying this scatter plot, which does not cluster along the diagonal as desired, a “bundled loss” phenomenon is found. In a setting where both the hedging and the hedged contracts have 100,000 years of simulated losses, thi...

Most authors who studied the problem of option hedging in incomplete markets, and, in particular, in models with jumps, focused on finding the strategies that minimize the residual hedging error. However, the resulting strategies are usually unrealistic because they require a continuously rebalanced portfolio, which is impossible to achieve in practice due to transaction costs. In reality, the ...

In planning and scheduling of production systems manufacturers have two main strategies for responding to uncertainty: they build inventory to hedge against periods in which the production capacity is not suucient to satisfy demand, or they temporarily increase the production capacity. We consider the problem of minimizing the long-run average cost of holding inventory and/or purchasing extra c...