Mean-variance hedging of basis risk

Melusi Mavuso will present the Department of Statistical Science seminar with a talk entitled, "Mean-variance hedging of basis risk".

Melusi Mavuso is a lecturer in the Department of Statistical Sciences.

Abstract: We begin by giving an overview of some modern techniques that are used for hedging derivatives in incomplete markets and give an outline of mean-variance hedging as a useful tool in this context. We then show how mean-variance hedging is applied to some specific examples. We first consider the standard basis risk problem where an option is written on an untradable underlying asset. We derive a mean-variance optimal dynamic hedging strategy based on a liquidly traded correlated asset, and study the strategy’s performance in comparison with other trading strategies. We then generalize this example to when the underlying asset is tradable but illiquid. In both examples, we derive closed-form formulae for the expected squared replication error. We end by exploring how these techniques can also be applied to interest rate derivatives.

Mon, 22 May 2017 - 13:00

Lecture Theatre 3, PD Hahn Building, Upper Campus, UCT