OPTIMIZING HEDGING STRATEGIES THROUGH UTILITY THEORY

Abstract

We reviewed the utility based option trading and hedging approach as well as other results under the asymptotic analytical approximation method and introduced the option hedging problem which clearly illustrates the intuition behind the hedging bandwidth and volatility adjustment. However, we used the multi-period measure determine the absolute risk aversion to formulate a dynamic spectrum of variation for the market risk. Hence, determine the best hedging strategy under the frame work of utility based hedging method, the hedger’s value function, market volatility, the rate of purchase (call) and sales (put) on risky assets with sufficient precision.