Optimal partial hedging in a discrete-time market as a Knapsack problem

DOI10.1007/S00186-010-0327-0zbMATH Open1203.93213arXiv0910.5101OpenAlexW2058098030MaRDI QIDQ607677FDOQ607677

Authors: Peter Lindberg 

Publication date: 3 December 2010

Published in: Mathematical Methods of Operations Research (Search for Journal in Brave)

Abstract: We present a new approach for studying the problem of optimal hedging of a European option in a finite and complete discrete-time market model. We consider partial hedging strategies that maximize the success probability or minimize the expected shortfall under a cost constraint and show that these problems can be treated as so called knapsack problems, which are a widely researched subject in linear programming. This observation gives us better understanding of the problem of optimal hedging in discrete time.

Full work available at URL: https://arxiv.org/abs/0910.5101

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zbMATH Keywords

greedy algorithmquantile hedgingefficient hedgingbinomial modelKnapsack problem

Mathematics Subject Classification ID

Portfolio theory (91G10) Discrete-time control/observation systems (93C55) Optimal stochastic control (93E20)

Cites Work

• Quantile hedging
• Title not available (Why is that?)
• Stochastic finance. An introduction in discrete time
• Efficient hedging: cost versus shortfall risk
• New trends in exact algorithms for the \(0-1\) knapsack problem
• Title not available (Why is that?)
• Shortfall risk minimization under model uncertainty in the binomial case: adaptive and robust approaches
• Explicit solutions for shortfall risk minimization in multinomial models.
• Discrete search and the Neyman-Pearson lemma
• Shortfall risk minimising strategies in the binomial model: characterisation and convergence

Cited In (3)

• On optimal partial hedging in discrete markets
• Partial hedging and cash requirements in discrete time
• Optimal partial hedging of an American option: shifting the focus to the expiration date

Uses Software

• Knapsack

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