Optimal Strategy for Certain Hedging Problem

Event information
Venue:DM 409A

Abstract: Under the constraint of terminal risk, we search for an optimal deterministic strategy to reduce the running risk in hedging a long-term commitment with short-term futures contracts. An explicit solution is given if the underlying stock follows the simple stochastic differential equation: $dS_t =mu dt + sigma dB_t$, where $B_t$ is the standard Brownian motion. Our result generalizes the result by G. Larcher and G. Leobacher, and we also provide a solution to the utility optimization problem posed by them.