Stochastic method of dynamic hedging applied to the high liquid asset markets

Abstract

In this study, the problem of hedging the risk of price slumping for a given volume of high-liquid assets is considered. One such possible hedging strategy may be the management of a portfolio constituted by the futures contracts holding a short position with respect to the basic asset. Besides that, the amount of having been sold futures is to satisfy the restrictions on the admissible minimal and maximum volume at each instant of time. The goal of such portfolio management is the increase of the weighted average price of futures sales through the speculative transactions realized in the real-time regime. Moreover, as feedback in the process of such management realization, one may use the prices of being executed market bargains only. The efficiency of the proposed hedging scheme is demonstrated by its comparison with the financial results achieved by the static hedging in the process of their both practical realizations based on the historical market prices. In this paper by the “dynamic hedging” concept, one means the execution of speculative transactions with futures taking a short position to provide the additional value of basic asset taking a long position. This notion is introduced in counterweight to the “static hedging” concept when the futures quantity does not vary in time and which goal is to preserve the basic asset value only.