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

Peter G. Lindberg

Papers from arXiv.org

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.

Date: 2009-10
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