How do you determine optimal hedge?
“It is not possible to participate in the upside of the option without some exposure to the risk of the underlying.”
A Review of “Optimal Hedging of Assets with Pathological Distributions of Returns” by Graham L. Giller
Graham L. Giller’s paper delves into the complex realm of hedging assets characterized by “pathological” distributions of returns. Moreover, a concept he articulates using an incremental utility function for a special integral transform. Giller introduces the notion of “co-pathological” assets, where individually problematic assets can form a non-pathological portfolio when combined in precise ratios.
Furthermore, this theoretical framework leverages utility theory, particularly under conditions where traditional models, like mean-variance optimization, might falter due to behavioral economics critiques.
Giller’s approach not only enhances understanding of asset pairings that defy normal distribution logic but also expands on the utility of such pairings in practical hedging strategies, particularly in the derivative markets where standard hedging methods may not apply due to the inherent risk properties of the assets involved.
Download the full paper:
Optimal Hedging of Assets with Pathological Distributions of Returns by Graham L. Giller :: SSRN
How do you determine optimal hedge?
Essays On Trading Strategy : A Review
Crowd Artificial Intelligence For Optimal Trading Strategies
