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A Model for Optimizing Options and Futures
Author(s) -
Murtagh B.A.,
Murtagh R.W.
Publication year - 1995
Publication title -
international transactions in operational research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.032
H-Index - 52
eISSN - 1475-3995
pISSN - 0969-6016
DOI - 10.1111/j.1475-3995.1995.tb00031.x
Subject(s) - futures contract , currency , hedge , range (aeronautics) , computer science , mathematical optimization , econometrics , operations research , economics , financial economics , mathematics , macroeconomics , engineering , ecology , biology , aerospace engineering
This paper discusses the use of options and futures in minimizing the domestic currency cost of repaying a foreign currency debt. Because of the significant uncertainty in predicting the exchange rate at some future time, we develop a methodology for exploring the range of predictions for which it is optimal to hedge with futures, the range for which it is optimal to use options, and the range for which it is optimal to use a combination of both. Implementation of a nonlinear integer stochastic programming model is described and computational experience discussed.