Hedging volumetric risks using put options in commodity markets

Transcription

1 Hedging volumetric risks using put options in commodity markets Alexander Kulikov joint work with Andrey Selivanov Gazprom Export LLC Moscow Institute of Physics and Technology

2 Outline Definitions and motivation NA approach and Tail approaches Case of constant volume and solution of different optimization problems Example for random volume

3 Suppose that our income is VS, V random volume, S random price.

4 Suppose that our income is VS, V random volume, S random price. Motivation: how to choose hedge with value function g(s) such that X = VS + g(s) is optimal, i.e.

5 Suppose that our income is VS, V random volume, S random price. Motivation: how to choose hedge with value function g(s) such that X = VS + g(s) is optimal, i.e. U(X ) max, U utility function; EX ασ(x ) max; VaR(X ) min (ess inf X max).

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7 Value function of optimal hedge g(p) in the case of utility maximization ([OD06]) using CARA and joint lognormal distribution:

8 Distribution of income X in presence of hedge ([OD06]):

9 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Hedging using put options, and Tail

10 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Let us hedge using buying a number of put options. So the income of our portfolio will be as follows: Questions: X = VS + h((k S) + P(K)), h 0. how to maximize ), )? optimal h? optimal K? optimal pair (h, K)?

11 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Definition 2.1. ([?]) Suppose λ (0, 1]. Consider the set { D λ = Q : dq } dp 1/λ. Let us construct the function u λ (X ) = inf Q D λ E Q X, X L 0. This is a coherent utility function. The corresponding coherent risk measure is called Tail V@R of level λ.

12 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Suppose V 1 and S has lognormal distribution. Then due to [V11] we have that the optimal h for the fixed K is as follows: h (K) =, λ > Φ(ln(K P(K))), h (K) = 1, λ min(φ(ln(k P(K))), Φ(ln K) Φ(ln(K P(K)))). Theorem 2.4. Suppose h 0. Also suppose that here and further NA condition is fulfilled for the model with options. Then there exists λ 0 > 0 such that for λ < λ 0 the optimal hedge is as follows: (h, K ) = (1, ). So in this case it is optimal to sell the forward on basic asset.

13 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Suppose h 0. Suppose V 1 and S U[0, 1]. Solution for the fixed K is as follows:

14 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume As a result we have that for λ min(1 K P(K 0 ), 1 P(1), P(1)), where the optimal hedge is as follows: K 0 : P (K 0 ) = 1/2, (h, K ) = (1, 1), q λ = 1 P(1). So in this case it is optimal to sell the forward on basic asset.

15 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Theorems and conclusions

16 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Theorem 3.1. Suppose V is a nonnegative random variable and S is a random variable such that for all x supps we have that (x, ess inf V ) supp(s, V ). Then for all K and for measure of risk essential infinum we have the optimal hedge as follows: h (K) = ess inf V, ess inf X (K) = K P(K). And also we have that the optimal K = ess sup S. So in this case it is optimal to sell the infinum number of forwards on basic asset.

17 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Theorem 3.2. Suppose V is a nonnegative random variable such that P(V = ess inf V ) > 0 and S is a random variable such that supps = supp(s V = ess inf V ) Then for all K there exists λ 0 such that for λ < λ 0 the optimal hedge is as follows: h = ess inf V, ess inf X (K) = K P(K). And also we have λ 0 such that for λ < λ 0 the optimal K = ess sup S. So in this case it is optimal to sell the infinum number of forwards on basic asset.

18 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Example with random volume

19 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume Consider the following example: Let V U[1, b], S U[0, 1] and they are independent. Then due to the Theorem 3.1. we have that for all K and for measure of risk essential infinum we have the optimal hedge as follows: h (K) = ess inf V, ess inf X (K) = K P(K). And also we have that the optimal K = 1. So in this case it is optimal to sell the infinum number of forwards on basic asset. Let us for fixed K define λ(k)(a, h) = P(VS + h((k S) + P(K)) a).

20 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume The picture for λ(k)(a, h)

21 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume The picture for λ(k)(a 0, h) for small a 0 K P(K) is as follows: So for λ = λ 0, q λ (h) = a 0, h = h 0 1.

22 Case of constant volume and lognormal distribution Case of constant volume and uniform distribution Theorems Random volume The picture for λ(k)(a 1, h) for large a is as follows: So for λ = λ 1, q λ (h) = a 1, h =.

23 Results Hedging using put options: under investigation. options with different K s: X = VS + i h i ((K i S) + C(K i ))

24 Results Hedging using put options: under investigation. options with different K s: X = VS + i h i ((K i S) + C(K i )) position with some assets: X = V (S 1 + S 2 ) + i h i ((K i S i ) + C i (K i )) importance of the choice of K i : P(S i < q i ) = 1% P(S 1 < q 1, S 2 < q 2 ) 0.1% options on sum S1 + S 2

25 Results Hedging using put options: under investigation. options with different K s: X = VS + i h i ((K i S) + C(K i )) position with some assets: X = V (S 1 + S 2 ) + i h i ((K i S i ) + C i (K i )) importance of the choice of K i : P(S i < q i ) = 1% P(S 1 < q 1, S 2 < q 2 ) 0.1% options on sum S1 + S 2 hedging using expected shortfall.

26 Results Various optimization problems for hedging quantity risk. Hedging using and put options in the case of non random volume. Some results and theorems for non random case. Example of random volume and numeric and graphical solutions for hedging quantity risk in this case (there are nontrivial ones).

27 Results Thank you for your attention

28 Results Artzner P., Delbaen F., Eber J.-M., Heath D. Thinking coherently. Risk, 10 (1997), No. 11, p Y. Oum, S. Oren, S. Deng. with standard power options in a competitive wholesale electricity market. Naval Res. Logist. 53 (2006), No. 7, p N. Valedinskaya. Value at risk minimization for a model with options and volumetric risk. Diploma project at Moscow State University in 2010/11.