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472. A constrained simulation approach to robust risk management of derivative products.
Invited abstract in session TB-57: Risk management and valuation of financial contracts, stream Modern Decision Making in Finance and Insurance.
Tuesday, 10:30-12:00Room: S06 (building: 101)
Authors (first author is the speaker)
| 1. | Bertrand Tavin
|
| EMLYON Business School |
Abstract
This paper considers the problem of assessing and hedging the risk carried by a portfolio of non-standard derivative products managed with a parametric model. We first formalise the problem and define the framework in which it can be solved by using a constrained simulation approach with respect to the model parameters. Our approach is suitable for an agent who may be agnostic with respect to a prior model and who wish to account for expert views on the range of possible models. Instead of breaking them into several subproblems, the proposed methodology has the important advantage of answering the risk measurement and hedging question in one step. Namely, the agent needs to run the simulation just once to get the desired answers. We present numerical results obtained with recent market data when applying the method to a portfolio of variance swaps and forward-start options valued with stochastic volatility models. In this project we apply classic Operational Research techniques, namely constrained simulation, in a novel manner to risk measurement and hedging of trading portfolios.
Keywords
- Financial Modelling
- Risk Analysis and Management
- Simulation
Status: accepted
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