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The Cheapest Hedge:A Portfolio Dominance Approach

Author

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  • C. D. Aliprantis
  • I. A. Polyrakis
  • R. Tourky

Abstract

Investors often wish to insure themselves against the payoff of their portfolios falling below a certain value. One way of doing this is by purchasing an appropriate collection of traded securities. However, when the derivatives market is not complete, an investor who seeks portfolio insurance will also be interested in the cheapest hedge that is marketed. Such insurance will not exactly replicate the desired insured-payoff, but it is the cheapest that can be achieved using the market. Analytically, the problem of finding a cheapest insuring portfolio is a linear programming problem. The present paper provides an alternative portfolio dominance approach to solving the minimum-premium insurance portfolio problem. This affords remarkably rich and intuitive insights to determining and describing the minimum-premium insurance portfolios.

Suggested Citation

  • C. D. Aliprantis & I. A. Polyrakis & R. Tourky, 2002. "The Cheapest Hedge:A Portfolio Dominance Approach," Department of Economics - Working Papers Series 829, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:829
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-02/829.pdf
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    Cited by:

    1. Polak, George G. & Rogers, David F. & Sweeney, Dennis J., 2010. "Risk management strategies via minimax portfolio optimization," European Journal of Operational Research, Elsevier, vol. 207(1), pages 409-419, November.
    2. Huai-I. Lee & Min-Hsien Chiang & Hsinan Hsu, 2008. "A new choice of dynamic asset management: the variable proportion portfolio insurance," Applied Economics, Taylor & Francis Journals, vol. 40(16), pages 2135-2146.

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