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

Abstract

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.

Risk Aversion Based Inexact Stochastic Dynamic Programming Approach for Water Resources Management Planning under Uncertainty

“…Most of the previous SDP methods are effective for state problems with dynamic and sequential structures but are limited for providing recourse actions in order to minimize the expected costs or maximize the expected net system benefits over the whole states [1]. To address this, a number of TSP-based SDP researches were reported for dealing with problems where recourse decisions are desired, dynamic variations of system conditions are to be reflected and/or the available data information cannot be expressed with precision [34][35][36][37][38][39]. For example, Luo, B. et al [36] developed an interval stochastic dynamic programming model (ISDP) with embedded TSP submodels and applied it to a long-term water resources planning problem.…”