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How to manage risk for the online one-way trading problems?

Author

Listed:
  • LILI DING

    (Ocean University of China)

  • Zhao Xin

    (Ocean University of China)

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.

Suggested Citation

  • LILI DING & Zhao Xin, 2018. "How to manage risk for the online one-way trading problems?," Proceedings of International Academic Conferences 7708663, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:7708663
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    File URL: https://iises.net/proceedings/37th-international-academic-conference-budapest/table-of-content/detail?cid=77&iid=004&rid=8663
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    More about this item

    Keywords

    one-way online trading problem; online algorithm; competitive ratio; option; risk; reward;
    All these keywords.

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