Index-based hedging instruments such as industry loss warranties are increasingly recognized as effective hedging tools for insurance and reinsurance portfolios. However, wider adoption of these instruments is inhibited by basis risk, the difference between the index-based payoff and the buyer's actual loss. This study presents a systematic approach for potential buyers to analyze and manage ba...

Minimum-variance hedging of a contingent claim in discrete time is suboptimal when the contingent claim is hedged for multiple periods and the objective is to maximize the expected utility of cumulative hedging errors. This is because the hedging errors are not independent. The difference between a minimum-variance hedge and the optimal multiperiod hedge is called the hedging demand and depends...

Playing repeated matrix games (RMG) while maximizing the cumulative returns is a basic method to evaluate multi-agent learning (MAL) algorithms. Previous work has shown that UCB, M3, S or Exp3 algorithms have good behaviours on average in RMG. Besides, hedging algorithms have been shown to be effective on prediction problems. An hedging algorithm is made up with a top-level algorithm and a set ...

1 Hedging is an important topic for both financial practice and theory. The rational of hedging and the optimal hedging ratio is examined by many papers, but the choice of hedging instrument is much less investigated, or restricted to options and futures. In this paper we analyze different hedging strategies from the aspect of Hungarian exporters with a long euro position. We evaluate each stra...

Bacteria have developed an impressive ability to survive and propagate in highly diverse and changing environments by evolving phenotypic heterogeneity. Phenotypic heterogeneity ensures that a subpopulation is well prepared for environmental changes. The expression bet hedging is commonly (but often incorrectly) used by molecular biologists to describe any observed phenotypic heterogeneity. In ...

We consider the performance of the delta hedging strategy obtained from a local volatility model when using as input the physical prices instead of the model price process. This hedging strategy is called robust if it yields a superhedge as soon as the local volatility model overestimates the market volatility. We show that robustness holds for a standard Black–Scholes model whenever we hedge a...

This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences a...

This paper proposes a model-free approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions. The generality of this framework allows us to conduct an in-depth theoretical analysis of hedging strategies with a wide family of risk measures and pricing rules, and study the conditions under which the hedging problem admits a solution and pric...

We introduce a new criterion to perform hedging of contingent claims in incomplete markets. Our approach is close to the one proposed by Schweizer [Stochastic Process. Appl., 37 (1991), pp. 339– 363] in that it uses the concept of locally risk-minimizing strategies. But we aim at being more general by defining the local risk as a general, nonnecessarily quadratic, convex function of the local c...

It has often been argued that there exists an underlying biological basis of utility functions. Taking this line of argument a step further in this paper, we have aimed to computationally demonstrate the biological basis of the Black-Scholes functional form as applied to classical option pricing and hedging theory. The evolutionary optimality of the classical Black-Scholes function has been com...