Allocate optimal hedge for target costs or sensitivities
[PortSens,PortCost,PortHolds] = hedgeopt(Sensitivities,Price,CurrentHolds,FixedInd,NumCosts,TargetCost,TargetSens,ConSet)
| Number of instruments ( |
|
|
|
|
| (Optional) Number of fixed instruments ( |
| (Optional) Number of points generated along the cost
frontier when a vector of target costs ( |
| (Optional) Vector of target cost values along the cost
frontier. If |
| (Optional) |
| (Optional) Number of constraints ( |
The user-specified constraints included in ConSet
may
be created with the functions pcalims
or portcons
. However, the portcons
default PortHolds
positivity
constraints are typically inappropriate for hedging problems since
short-selling is usually required.
NPOINTS
, the number of rows in PortSens
and PortHolds
and
the length of PortCost
, is inferred from the inputs.
When the target sensitivities, TargetSens
, is entered, NPOINTS
= 1
; otherwise NPOINTS = NumCosts
, or
is equal to the length of the TargetCost
vector.
Not all problems are solvable (for example, the solution space
may be infeasible or unbounded, or the solution may fail to converge).
When a valid solution is not found, the corresponding rows of PortSens
, PortHolds
,
and the elements of PortCost
are padded with NaN
s
as placeholders.
[PortSens,PortCost,PortHolds] = hedgeopt(Sensitivities,Price,CurrentHolds,FixedInd,NumCosts,TargetCost,TargetSens,ConSet)
allocates
an optimal hedge by one of two criteria:
Minimize portfolio sensitivities (exposure) for a given set of target costs.
Minimize the cost of hedging a portfolio given a set of target sensitivities.
Hedging involves the fundamental tradeoff between portfolio insurance and the cost of insurance coverage. This function lets investors modify portfolio allocations among instruments to achieve either of the criteria. The chosen criterion is inferred from the input argument list. The problem is cast as a constrained linear least-squares problem.
PortSens
is a number of points
(NPOINTS
-by-NSENS
) matrix of portfolio
sensitivities. When a perfect hedge exists, PortSens
is zeros. Otherwise,
the best hedge possible is chosen.
PortCost
is a 1
-by-NPOINTS
vector
of total portfolio costs.
PortHolds
is an NPOINTS
-by-NINST
matrix
of contracts allocated to each instrument. These are the reallocated
portfolios.