Decreasing absolute risk aversion and option pricing bounds

Article Abstract:

A study was conducted to examine the rule of decreasing absolute risk aversion (DARA) dominance to generate efficient bounds for the price of a call option. Lower and upper bounds were achieved through the maximization and minimization of the objective function of a nonlinear optimization problem. The feasible set of the nonlinear problem emanating from the DARA hypothesis was investigated from mathematical and financial perspectives. Also, the explicit formula for solving the minimum problem in the presence of only three states of nature was given. The solution was found through an exponential utility function with a constant risk aversion. Moreover, the optimal solution point does not rely on the strike price. Finally, the DARA bounds that correspond to the solution were found to be more efficient than the bounds generated with dominance criteria of any order.

Risk assessment, Prices and rates, Options (Finance)

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Optimal strategic petroleum reserve policies: a steady state analysis

Article Abstract:

A model for determining optimal size, fillup, and drawdown rates for a Strategic Petroleum Reserve (SPR) is developed. The model can be used to determine an SPR policy that minimizes the expected time-averaged insecurity cost to the US due to uncertainty in the supply of imported oil. Base case results and sensitivity analyses derived by using the new model are compared to results obtained by two-period models and stochastic dynamic programming models. The new model allows extensive sensitivity analysis of supply and demand.

Analysis, Stochastic analysis, Petroleum, Petroleum reserves, United States. Strategic Petroleum Reserve

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