BFS 2002

Poster Presentation

A new algorithm for hedging large portfolios of derivative instruments

Stathis Tompaidis

We describe a methodology for identifying and hedging large portfolios of derivative instruments. The method, matching projection pursuit, is a variant of a popular statistical tool. We describe how the method can be used to hedge the portfolio with liquid, traded instruments. We present a numerical example, in which the most important vanilla structures are identified in an hierarchical manner, for a portfolio of exotic options.