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

Peter G. Lindberg

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arXiv · 0910.5101

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

Peter G. Lindberg

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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.

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Peter G. Lindberg. 2009-10-27. Optimal partial hedging in a discrete-time market as a knapsack problem. https://arxiv.org/abs/0910.5101

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