AUTHOR=Tsao Angela , Shi Xiang , Melnikov Alexander 

TITLE=CVaR hedging under stochastic interest rate

JOURNAL=Frontiers in Applied Mathematics and Statistics

VOLUME=1

YEAR=2015

URL=https://www.frontiersin.org/journals/applied-mathematics-and-statistics/articles/10.3389/fams.2015.00002

DOI=10.3389/fams.2015.00002

ISSN=2297-4687

ABSTRACT=<p>In this paper we assess the partial hedging problems by formulating hedging strategies that minimize conditional value-at-risk (CVaR) of the portfolio loss under stochastic interest rate environment. The combination of stochastic interest and CVaR hedging method makes the valuing approach more complex than the existing model with constant interest rate. We take up two issues in searching the optimal CVaR hedging strategy: given the initial capital constraint we minimize the CVaR of the portfolio loss; by prescribing a bound on the risk, we also minimize the hedging cost. As an illustration of this hedging technique we derive hedging strategies for a European call option with the Black Scholes setting under HJM framework; explicit formulas are presented. We also investigate CVaR hedging problems by using the real financial data.</p>