Topics on the portfolio management of financial investments

Abstract

This paper studies a strategy that minimizes the Value-at-Risk (VaR) of a position in a zero coupon bond by buying a percentage of a put option, subject to a fixed budget available for hedging. We elaborate a formula for determining the optimal strike price for this put option in case of a Vasicek stochastic interest rate model. We demonstrate the relevance of searching the optimal strike price, since moving away from the optimum implies a loss, either due to an increased VaR or due to an increased hedging expenditure. In this way, we extend the results of [Ahn et al., 1999], who minimize VaR for a position in a share. In addition, we look at the alternative risk measure Tail Value-at-Risk.