BFS 2002

Contributed Talk

Coherent Risk Minimization of Derivatives in Multiperiod Models

Berend Roorda, Jacob Engwerda, Hans Schumacher

The coherent risk principles are applied to quantify risk in derivatives under optimal hedging. Some theoretical aspects are discussed, and a fairly general dynamic programming solution is described. For convex European options and risk scenarios defined in terms of interval probabilities, computations are further reduced to a very simple recursion. An application on S&P 500 option data illustrates the results.
Keywords: Coherent Risk Measures; Robust Hedging; Interval Model; Limited Downside Risk; Option Pricing; Delta-hedging; Binomial tree; Incomplete Markets