Optimal Control and Hedging of Operations in the Presence of Financial Markets
26 Pages Posted: 5 Oct 2003
Abstract
We consider the problem of dynamically hedging the profits of a corporation when these profits are correlated with returns in the financial markets. In particular, we consider the general problem of simultaneously optimizing over both the operating policy and the hedging strategy of the corporation. We discuss how different informational assumptions give rise to different types of hedging and solution techniques. Finally, we solve some problems commonly encountered in operations management to demonstrate the methodology.
Keywords: Operations management, portfolio optimization, stochastic control, incomplete markets
JEL Classification: G11
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