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

Peter Lindberg ()

Mathematical Methods of Operations Research, 2010, vol. 72, issue 3, 433-451

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. Copyright Springer-Verlag 2010

Keywords: Efficient hedging; Quantile hedging; Knapsack problem; Greedy algorithm; Binomial model (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s00186-010-0327-0

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