Optimal Derivatives Strategies with Discrete Rebalancing
Branger Nicole, Breuer Beate, Schlag Christian
In this article, we determine the optimal investmentstrategy with derivatives for discrete rebalancing intervals.We find that the investor buys a more conservativeportfolio and strongly reduces his exposure tovolatility compared to the continuous-time case. Thisleads to much less extreme positions in the derivatives.Even with monthly rebalancing, the investorcan nevertheless realize up to almost two-thirds ofthe utility gain from option trading in continuoustime. Variance contracts are useful due to their stable exposures to volatility and jump risk.
Asset Allocation; Discrete Trading; Use of Derivatives