29 Pages Posted: 8 Feb 2017 Last revised: 8 May 2019
Date Written: March 1, 2019
This note presents an extension of the Markoviz-type "mean-variance" portfolio optimisation approach over one period to portfolios of derivatives. Most notably, we show that once "writing off" parts of the portfolio is allowed, we naturally arrive at using "cash-invariant monotone hulls" a'la Filipovic/Kupper to construct sensible convex measures of risk.
We recommend using "Quadratic CVaR" as the most natural convex risk replacement for mean-variance optimisation. We also explain why classic Greek-based approaches are inferior to our approach for managing portfolios of derivatives.
This note summarises results presented at Global Derivatives 2013 and 2014 and provides a more generalised view on the problem at hand. This work contains little original contributions; its aim to motivate the use of convex risk measures and their construction via cash-invariant monotone hulls from a practitioner's point of view.
Keywords: Portfolio Optimization for Derivatives, Incomplete Market, Convex Risk Measure, Quadratic CVaR
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