Proceedings of the 37th International Academic Conference, Budapest

HOW TO MANAGE RISK FOR THE ONLINE ONE-WAY TRADING PROBLEMS?

LILI DING, ZHAO XIN

Abstract:

This paper studies online one-way trading problem, where an investor is given the task of trading dollars to yen. Each day, a new exchange rate is given and the investor must decide how many dollars to convert to yen without knowing the future exchange rates. Since El-Yaniv originally proposed this online problem and presented an optimal threat-based trading strategy, many researchers have been working on innovation based on this model. From the financial risk view, this paper extended El-Yaniv’s traditional one-way trading model to present a risk management framework by introducing American put option with the first price as the strike price. This framework extends pure competitive analysis and allows investors to benefit from options. Second, since the option can help the investors to hedge risk, we extend analysis of Al-Binali (1999) to design the option-forecast trading strategy with twice forecasts. The results show that the option-forecast trading strategy constrains the risk of sudden dropping to the minimum price through the American put option. Compared with former research, the competitive ratio of the option-forecast trading strategy is improved effectively.

Keywords: one-way online trading problem; online algorithm; competitive ratio; option; risk; reward

DOI: 10.20472/IAC.2018.037.004

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