Optimal Risk Management Using Options

Posted: 21 Dec 1997

See all articles by Dong-Hyun Ahn

Dong-Hyun Ahn

University of North Carolina at Chapel Hill

Jacob Boudoukh

Reichman University - Interdisciplinary Center (IDC) Herzliyah

Matthew P. Richardson

Department of Finance, Leonard N. Stern School of Business, New York University

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

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Abstract

This paper addresses the question of how an institution might optimally manage the market risk of a given exposure. We provide an analytical approach to optimal risk management under the assumption that the institution wishes to minimize its Value-at-Risk (VaR) using options follows a geometric Brownian. The optimal solution specifies the VaR-minimizing level of moneyness of the option as a function of the asset's distribution, the risk-free rate, and the VaR hedging period. We find that the optimal strike of the put is independent of the level of expense the institution is willing to incur for its hedging program.

JEL Classification: G13, G10

Suggested Citation

Ahn, Dong-Hyun and Boudoukh, Jacob and Richardson, Matthew P. and Whitelaw, Robert F., Optimal Risk Management Using Options. Available at SSRN: https://ssrn.com/abstract=48560

Dong-Hyun Ahn

University of North Carolina at Chapel Hill ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3203 (Phone)
919-962-2068 (Fax)

Jacob Boudoukh

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

Matthew P. Richardson (Contact Author)

Department of Finance, Leonard N. Stern School of Business, New York University ( email )

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Robert F. Whitelaw

New York University ( email )

Stern School of Business
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New York, NY 10012-1126
United States
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212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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