"Department of Industrial Engineering and Economics Working Paper 2017-7" is now available

Department of Industrial Engineering and Economics issues the series of Working Paper to highlight our recent research activities.

The latest issue, 2017-7: Taeko Kuwayama, Tomonari Kitahara, Shinji Mizuno, Sho Uekusa, A CVaR model with an optimal hedging strategy for international portfolio selection

Title of original paper

A CVaR model with an optimal hedging strategy for international portfolio selection

Author

Taeko Kuwayama, Tomonari Kitahara, Shinji Mizuno, Sho Uekusa

Abstract

For international portfolio selection, currency risks affect the performance of a portfolio. We can reduce currency risks by introducing forward contracts. In this paper, we propose an optimization model for international portfolio selection with hedging strategies using forward contracts. As a risk measure, we use Conditional Value at Risk (CVaR) of the portfolio's return. The model decides both a portfolio and hedge ratios simultaneously such that CVaR is minimized under the condition that the expected return of the portfolio is not less than a predetermined value. At first, the model is formulated as a nonlinear programming problem. Then we will show that the model is equivalently converted to a linear programming problem. We conduct numerical experiments to evaluate the proposed model. As a result, we observe that the proposed model automatically adjusts the portfolio and the hedge ratios according to market environments and this adjustment leads to a stable performance of the portfolio.

Following issues of Working Paper will appear as soon as available.

• Publications
• Department of Industrial Engineering and Economics Working Paper 2017-7