The Term Structure of Optimal Operations

Guiotto, Paolo; Roncoroni, Andréa; Turcic, Danko

doi:10.1561/0200000096-9

Cited by 1 publication

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“…A sixth direction is to extend the role of the time T of uncertainty resolution to that of a decision variable, and examine the effect of our combined custom hedge on T . Appendix EC.1(K) gives a snapshot of conjectures put forward in Guiotto et al (2020). An alternative path might be to explore the role of T as an entry time as in Leung and Ludkovski (2011).…”

Section: Future Developmentsmentioning

confidence: 99%

Combined Custom Hedging: Optimal Design, Noninsurable Exposure, and Operational Risk Management

Guiotto

Roncoroni

2022

Operations Research

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Optimal Design of Combined Contingent Claims: Theory and Applications. In “Combined Custom Hedging: Optimal Design, Noninsurable Exposure, and Operational Risk Management”, Paolo Guiotto and Andrea Roncoroni develop a normative framework for the optimal design, value assessment, and operations management integration of financial derivatives. Most business and operating revenues entail a mix of financially insurable and noninsurable risk. A risk-averse firm may face them by positioning in a pair of financial derivatives with optimal bespoke payoff functions; one claim is written on the insurable term, and the other claim is written on any observable index exhibiting correlation to the noninsurable term. On a theoretical ground, the authors 1) state the problem in a general setup and prove existence and uniqueness of the optimal pair of combined claims, 2) show that the optimal payoff functions satisfy a Fredholm integral equation, and 3) assess the incremental benefit the firm obtains by switching from the optimal single-claim custom hedge to the optimal combined custom hedge they propose. On an experimental ground, they show that 1) the optimal combined custom hedge would be empirically relevant for a highly risk-averse firm facing a market shock shown during the first period of the COVID-19 pandemic in 2020, 2) integration with the optimal procurement in a generalized newsvendor model leads to a significant improvement in both risk and return, and: 3) this gain can be traded off for a substantial enhancement in operational flexibility.

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Section: Future Developmentsmentioning

confidence: 99%