Allocate optimal hedge for target costs or sensitivities
[PortSens,PortCost,PortHolds] = hedgeopt(Sensitivities,Price,CurrentHolds,FixedInd,NumCosts,TargetCost,TargetSens,ConSet)
Number of instruments (
(Optional) Number of fixed instruments (
(Optional) Number of points generated along the cost
frontier when a vector of target costs (
(Optional) Vector of target cost values along the cost
(Optional) Number of constraints (
The user-specified constraints included in
be created with the functions
portcons. However, the
constraints are typically inappropriate for hedging problems since
short-selling is usually required.
NPOINTS, the number of rows in
the length of
PortCost, is inferred from the inputs.
When the target sensitivities,
TargetSens, is entered,
= 1; otherwise
NPOINTS = NumCosts, or
is equal to the length of the
Not all problems are solvable (for example, the solution space
may be infeasible or unbounded, or the solution may fail to converge).
When a valid solution is not found, the corresponding rows of
and the elements of
PortCost are padded with
[PortSens,PortCost,PortHolds] = hedgeopt(Sensitivities,Price,CurrentHolds,FixedInd,NumCosts,TargetCost,TargetSens,ConSet) allocates
an optimal hedge by one of two criteria:
Minimize portfolio sensitivities (exposure) for a given set of target costs.
Minimize the cost of hedging a portfolio given a set of target sensitivities.
Hedging involves the fundamental tradeoff between portfolio insurance and the cost of insurance coverage. This function lets investors modify portfolio allocations among instruments to achieve either of the criteria. The chosen criterion is inferred from the input argument list. The problem is cast as a constrained linear least-squares problem.
PortSens is a number of points
NSENS) matrix of portfolio
sensitivities. When a perfect hedge exists,
PortSens is zeros. Otherwise,
the best hedge possible is chosen.
PortCost is a
of total portfolio costs.
PortHolds is an
of contracts allocated to each instrument. These are the reallocated