Portfolio Optimisation and Risk Management: Option Hedging

Ing. Eduardo Pereiras Navas

Master's thesis

Abstract:

In the following thesis, it has been studied the theories of portfolio optimization and the problems and issues involving these theories, which entails defining what variables are useful when studying a group of stocks, and to what extent it is possible to determine in what proportion the stocks should be distributed. Likewise, it has been seen what problems involve the use of historical data to define a portfolio, and was given recommendations for the correct use of the theories.It is concluded that the combination of methods (portfolio optimization theories, value at risk and other ad-hoc analysis), must be combined in order to achieve the different possible objectives Based on the results obtained, it was studied the valuation of derivatives (in this case options), and which derivative instruments strategies based on the analytical results, allowed to approximate the future behaviour of these instruments and the efficient risk mitigation. Lastly, it is seen that the combination of theories, in addition to dynamic hedging approach, provide under certain circumstances, satisfactory risk hedge in base to the variables which were determined initially.

Abstract:

In the following thesis, it has been studied the theories of portfolio optimization and the problems and issues involving these theories, which entails defining what variables are useful when studying a group of stocks, and to what extent it is possible to determine in what proportion the stocks should be distributed. Likewise, it has been seen what problems involve the use of historical data to define a portfolio, and was given recommendations for the correct use of the theories.It is concluded that the combination of methods (portfolio optimization theories, value at risk and other ad-hoc analysis), must be combined in order to achieve the different possible objectives Based on the results obtained, it was studied the valuation of derivatives (in this case options), and which derivative instruments strategies based on the analytical results, allowed to approximate the future behaviour of these instruments and the efficient risk mitigation. Lastly, it is seen that the combination of theories, in addition to dynamic hedging approach, provide under certain circumstances, satisfactory risk hedge in base to the variables which were determined initially.

Keywords

Risk-management, Derivatives, Portfolio optimization.

Language used: English

Date on which the thesis was submitted / produced: 17. 4. 2019

Thesis defence

• Date of defence: 12. 6. 2019
• Supervisor: Ing. Eva Kostikov, Ph.D.
• Reader: Ing. David Mareš, Ph.D.

University of Finance and Administration

Master programme / field:
Economics and Management / Business Management and Corporate Finance