Optimal partial hedging in a discrete-time market as a knapsack problem

2009/10/27 by Peter Lindberg, Lindberg, Peter G.
Business, Management and Accounting · Decision Sciences · Economics, Econometrics and Finance · #Computational Finance (q-fin.CP) #FOS: Economics and business #Pricing of Securities (q-fin.PR) #Risk and Portfolio Optimization #Stochastic processes and financial applications #Supply Chain and Inventory Management

paper · pdf · doi:10.48550/arxiv.0910.5101

openalex publication_date 2009/10/27 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

We present a new approach for studying the problem of optimal hedging of a European option in a finite and complete discrete-time market model. We consider partial hedging strategies that maximize the success probability or minimize the expected shortfall under a cost constraint and show that these problems can be treated as so called knapsack problems, which are a widely researched subject in linear programming. This observation gives us better understanding of the problem of optimal hedging in discrete time.

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