Optimal Control and Hedging of Operations in the Presence of Financial Markets

26 Pages Posted: 5 Oct 2003

See all articles by Rene Caldentey

Rene Caldentey

University of Chicago - Booth School of Business

Martin Brendan Haugh

Imperial College Business School

Abstract

We consider the problem of dynamically hedging the profits of a corporation when these profits are correlated with returns in the financial markets. In particular, we consider the general problem of simultaneously optimizing over both the operating policy and the hedging strategy of the corporation. We discuss how different informational assumptions give rise to different types of hedging and solution techniques. Finally, we solve some problems commonly encountered in operations management to demonstrate the methodology.

Keywords: Operations management, portfolio optimization, stochastic control, incomplete markets

JEL Classification: G11

Suggested Citation

Caldentey, Rene and Haugh, Martin Brendan, Optimal Control and Hedging of Operations in the Presence of Financial Markets. Available at SSRN: https://ssrn.com/abstract=447060 or http://dx.doi.org/10.2139/ssrn.447060

Rene Caldentey

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://www.chicagobooth.edu/faculty/directory/c/rene-caldentey

Martin Brendan Haugh (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

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