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Minimizing the Risk of a Financial Product Using a Put Option
Author(s) -
Deelstra Griselda,
Vanmaele Michèle,
Vyncke David
Publication year - 2010
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2010.01365.x
Subject(s) - hedge , position (finance) , product (mathematics) , bond , class (philosophy) , economics , econometrics , strike price , mathematical economics , mathematics , computer science , finance , volatility (finance) , ecology , geometry , artificial intelligence , biology
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.