Risk minimization under budget constraints

Kiseop Lee

Journal of Risk Finance, 2008, vol. 9, issue 1, 71-80

Abstract: Purpose - The purpose of this paper is to find the optimal hedging strategy when an investor has budget constraints on both the initial capital and the future cash flow. Design/methodology/approach - The paper follows the utility minimization of the total cost, using convex utility functions on both initial capital and future cash flows. Findings - Closed‐form solutions of optimal hedging strategies are found in some specific but popular cases. It is also found that this method corresponds to the local risk minimization method in quadratic hedging. Research limitations/implications - Hedging strategies are calculated for only two popular choices. One may want to calculate hedging strategies for other popular utility functions such as power utility or HARA utility. Practical implications - When a trader has some budget constraint in both initial capital and future cash flows, this paper gives a simple alternative. Originality/value - Budget constraints on both initial capital and future cash flow are new to this kind of study. Connection to the local risk minimization strategy is original too.

Keywords: Hedging; Budgets; Cost reduction; Risk management (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940810842429

DOI: 10.1108/15265940810842429

Access Statistics for this article

Journal of Risk Finance is currently edited by Nawazish Mirza

More articles in Journal of Risk Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().