Wed.3 16:00–17:15 | H 2053 | APP
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Applications in Finance and Real Options

Chair: Luis Zuluaga
16:00

Daniel Ralph

joint work with Rutger-Jan Lange, Kristian Støre

“POST”, a robust method for Real-Option Valuation in Multiple Dimensions Using Poisson Optional Stopping Times

We provide a new framework for valuing multidimensional real options where opportunities to exercise the option are generated by an exogenous Poisson process; this can be viewed as a liquidity constraint on decision times. This approach, which we call the Poisson optional stopping times (POST) method, finds the value function as a monotone and linearly convergent sequence of lower bounds. In a case study, we demonstrate the effectiveness of POST by comparing it to the frequently used quasi-analytic method, showing some difficulties that arise when using the latter. POST has a clear convergence analysis, is straightforward to implement and robust in analysing multidimensional option-valuation problems of modest dimension.

16:25

Peter Schütz

joint work with Sjur Westgaard

Optimal hedging strategies for salmon producers

We use a multistage stochastic programming model to study optimal hedging decisions for risk-averse salmon producers. The objective is to maximize the weighted sum of expected revenues from selling salmon either in the spot market or in futures contracts and Conditional Value-at-Risk (CVaR) of the revenues over the planning horizon. The scenario tree for the multistage model is generated based on a procedure that combines Principal Component Analysis and state space modelling. Results indicate that salmon producers should hedge price risk already at fairly low degrees of risk aversion.

16:50

Luis Zuluaga

joint work with Juan Vera, Onur Babat

Computing near-optimal Value-at-Risk portfolios using integer programming techniques

Value-at-Risk (VaR) is one of the main regulatory tools used for risk management purposes. However, it is difficult to compute optimal VaR portfolios; that is, an optimal risk-reward portfolio allocation using VaR as the risk measure. This is due to VaR being non-convex and of combinatorial nature. Here, we present an algorithm to compute near-optimal VaR portfolios that takes advantage of a MILP formulation of the problem and provides a guarantee of the solution’s near-optimality.