Minimizing the Risk of a Financial Product Using a Put Option

Griselda Deelstra, Michèle Vanmaele and David Vyncke

Journal of Risk & Insurance, 2010, vol. 77, issue 4, 767-800

Abstract: In this article, we elaborate a method for determining the optimal strike price for a put option, used to hedge a position in a financial product such as a basket of shares and a bond. This strike price is optimal in the sense that it minimizes, for a given budget, a class of risk measures satisfying certain properties. Formulas are derived for one single underlying as well as for a weighted sum of underlyings. For the latter we will consider two cases depending on the dependence structure of the components in this weighted sum. Applications and numerical results are presented.

Date: 2010
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https://doi.org/10.1111/j.1539-6975.2010.01365.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:77:y:2010:i:4:p:767-800

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