Optimizing international portfolios with options and forwards

Topaloglou, Nikolas; Vladimirou, Hercules; Zenios, Stavros A.

doi:10.1016/j.jbankfin.2011.05.003

Cited by 31 publications

(22 citation statements)

References 48 publications

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“…Nonlinear risk can be hedged using nonlinear instruments such as options, for instance. The conclusions were also supported by Darren [7], Topaloglou et al [8] and Maciej [9]. To fill the gap of using options as a hedging instrument, Machnes [10] examined the behavior of a competitive firm in the presence of commodity options and price uncertainty.…”

Section: Introductionmentioning

confidence: 59%

Optimal Hedging with Options and Futures against Price Risk and Background Risk

Sun

2017

MCA

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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 taken the budget of buying options into consideration. The model is fairly general and some existing models are special cases of it. We firstly derive the necessary and sufficient conditions that guarantee the optimality of an under-hedge, a full-hedge and an over-hedge of futures for the risk-averse utility. Then, sufficient conditions are stipulated under which an over-hedge is optimal. Furthermore, we propose a program minimizing of tail conditional expectation (TCE), which is inherently equivalent to the risk measure of expected shortfall risk (ES) or the conditional VaR (CVaR) under the continuous-time framework. Finally, we find that ES, in our proposed model, is significantly smaller than the one in the model of options hedging only. Therefore, the results emphasize the need for combining futures hedging and options hedging, and it also shows that imposing background risk, whether it be additive or multiplicative, always has a great impact on the hedging efficiency. We also present some sensitivities of the relevant parameters to provide some suggestions for the investors.

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Section: Introductionmentioning

confidence: 59%

Optimal Hedging with Options and Futures against Price Risk and Background Risk

Sun

2017

MCA

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“…of moment-matching method (Hochreiter and Pflug [40] ; Topaloglou, et al [21,22] ) for multi-asset financial optimization problems, we apply this method in this study. Thus, the scenario sets must capture their joint co-variation consistently with market observations and financial fundamentals such as no-arbitrage condition.…”

Section: Scenario Generationmentioning

confidence: 99%

“…Second, based on scenario trees, it can handle almost entire distribution of asset returns, especially for portfolios with options with alternative distributions, and thereby allow for a broad variety of objectives and constraints. Strong support for its important contributions can be inferred from diverse applications; see, Klaassen [18] , Gaivoronski, et al [19] , Abdelaziz [20] , Topaloglou, et al [21,22] , Xu, et al [23] , Zeng and Li [24] , He and Meng [25] , Zhang [26] , etc.…”

Section: Introductionmentioning

confidence: 98%

“…Our approach is inspired by the most recent stream by Topaloglou, et al [22] , who proposed a stochastic programming model for market risk hedging with vanilla options and currency risk hedging with quanto options, establishing the superiority of the mechanism over traditional approaches. We therefore take the advantage of this approach and try to investigate the role of basket options in the context of international asset allocation and risk management.…”

Section: Introductionmentioning

confidence: 99%

“…First, we extend the work of Topaloglou, et al [22] to multi-stage framework with dynamic adjustments and time-varying investment opportunities, while their work only focuses on one-stage in a static view. The promising improvement of a multi-stage extension is twofold.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Risk management for international portfolios with basket options: A multi-stage stochastic programming approach

Yin

韩立岩(Han

2015

J Syst Sci Complex

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The authors consider the problem of active international portfolio management with basket options to achieve optimal asset allocation and combined market risk and currency risk management via multi-stage stochastic programming (MSSP). The authors note particularly the novel consideration and significant benefit of basket options in the context of portfolio optimization and risk management. Extensive empirical tests strongly demonstrate that basket options consistently have more clearly improvement on portfolio performances than a portfolio of vanilla options written on the same underlying assets. The authors further show that the MSSP model provides as a supportive tool for asset allocation, and a suitable test bed to empirically investigate the performance of alternative strategies.

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Optimal portfolio of continuous‐time mean‐variance model with futures and options

Yan

2018

Optim Control Appl Methods

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Summary This paper is concerned with the portfolio selection of options that have different sale and purchase prices based on the continuous‐time mean‐variance criterion in financial markets. The optimal investment problem is formulated as a continuous‐time mathematical model. These price processes follow jump‐diffusion processes (the Weiner process and the Poisson process). With the theory of stochastic linear‐quadratic control and viscosity solutions, the corresponding Hamilton‐Jacobi‐Bellman equation of the problem is represented and its solutions are obtained in different conditions. The optimal investment strategies are presented. In addition, the efficient frontier is also illustrated. Finally, an example and some discussions illustrating these results are also presented.

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Optimizing international portfolios with options and forwards

Cited by 31 publications

References 48 publications

Optimal Hedging with Options and Futures against Price Risk and Background Risk

Optimal Hedging with Options and Futures against Price Risk and Background Risk

Risk management for international portfolios with basket options: A multi-stage stochastic programming approach

Optimal portfolio of continuous‐time mean‐variance model with futures and options

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