2016 Optimization Days

HEC Montréal, Québec, Canada, May 2 — 4, 2016

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TB6 Dynamic Optimization in Finance II

May 3, 2016 03:30 PM – 05:10 PM

Location: CPA du Québec

Chaired by Michel Denault

3 Presentations

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    03:30 PM - 03:55 PM

    Optimal hedging using dynamic programming

    • Edith Viau, presenter, HEC Montréal
    • Michèle Breton, GERAD, HEC Montréal
    • Frédéric Godin, Université Laval

    We propose an efficient dynamic programming implementation to compute hedging strategies when the objective is to minimize the squared hedging error. Results are used to compare this strategy to delta hedging.

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    03:55 PM - 04:20 PM

    Evaluation of counterparty risk for derivatives with early-exercise features

    • Oussama Marzouk, presenter, HEC Montréal
    • Michèle Breton, GERAD, HEC Montréal

    We introduce an efficient approach to evaluate counterparty risk and we compute the Credit Valuation Adjustment for derivatives having early-exercise features. The computation model is based on a Dynamic Programming representation of both the vulnerable and the risk-free financial instruments, coupled with spectral interpolation of the value function. The approach is flexible and can account for wrong-way risk and various models for the underlying risk factors. Numerical experiments are presented to illustrate the versatility of the method and its efficiency with respect to the approaches that are currently used in the industry.

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    04:20 PM - 04:45 PM

    Portfolio choices by simulation and regression: Value function vs portfolio weight recursions

    • Michel Denault, presenter, GERAD - HEC Montréal
    • Jean-Guy Simonato, HEC Montréal

    We consider simulation-and-regression approaches to solve multi-period, dynamic portfolio choice problems. We specifically investigate the issue of using value function recursions vs portfolio weights recursions. The issue is often encountered in dynamic programming, and is also referred to as "regressed values" vs "realized values".

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