Value of Hedging - Final - THE VALUE OF HEDGING A...

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Unformatted text preview: THE VALUE OF HEDGING A DISSERTATION SUBMITTED TO THE DEPARTMENT OF MANAGEMENT SCIENCE & ENGINEERING AND THE COMMITTEE ON GRADUATE STUDIES OF STANFORD UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY Thomas C. Seyller March 2008 ii Copyright by Thomas Seyller 2008 All rights reserved iii I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. _______________________________ (Ronald A. Howard) Principal Adviser I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. _______________________________ (Ali E. Abbas) I certify that I have read this dissertation and that, in my opinion, it is fully adequate in scope and quality as a dissertation for the degree of Doctor of Philosophy. _______________________________ (Samuel S. Chiu) Approved for the Stanford University Committee on Graduate Studies. iv Abstract In this dissertation I introduce a definition of hedging which is based on the comparison of two indifferent buying prices. With that definition, it then becomes possible to ascribe a monetary value to the hedging provided by a specific deal with respect to the decision- makers existing portfolio. The value of hedging concept can also be used to identify within a list of several deals the ones that best complement the portfolio. Next, I present some fundamental properties of the value of hedging, including some which only arise if the decision-makers u-curve satisfies the delta property. I also shed some light on the probabilistic phenomena which are at the source of hedging: in that part of the thesis, I show that hedging can be thought of as moment reengineering, in other words, as an opportunity to favorably reshape the moments of the decision-makers portfolio by adding other deals to it. The last concept I introduce is that of the value of perfect hedging. While the value of hedging captures how well a specific deal would fit within the existing portfolio, the value of perfect hedging captures the decision-makers willingness to pay for the best hedges one can construct to complement his portfolio, based on a specific uncertainty. Such an analysis provides three significant benefits to the decision-maker: first, it enables him to decide how much of his resources he should devote to searching for hedges; secondly, it allows him to identify the uncertainties on which it is most valuable to hedge, and therefore to focus his search on the most promising classes of deals; and finally, the value of perfect hedging can help him establish an upper bound on his personal indifferent buying price for any uncertain deal which he might be considering acquiring....
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This note was uploaded on 03/11/2012 for the course MANAGEMENT dsc156 taught by Professor Howard during the Spring '12 term at Texas A&M University–Commerce.

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Value of Hedging - Final - THE VALUE OF HEDGING A...

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