Optimum short-term futures hedge using stochastic linear programming Online publication date: Mon, 18-Jun-2007
by Samuel Frimpong, Kwame Awuah-Offei, George Dogbe
International Journal of Risk Assessment and Management (IJRAM), Vol. 7, No. 5, 2007
Abstract: Classical optimal hedge ratio concentrates on risk reduction and neglects strategic value maximisation. In this study, the authors use stochastic optimisation theories to formulate an optimal, short-term hedging scheme to mitigate risks while maximising portfolio value. Stochastic spot and futures price models are used to simulate prices. The periodic optimal hedge ratios are determined using the stochastic-optimisation algorithm. The algorithm is implemented in a Hedge-Position-Optimiser (HPO) which is verified and validated using crude oil and gold data. The results show that HPO adds value to projects by increasing portfolio value while reducing the associated risks.
Online publication date: Mon, 18-Jun-2007
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