Optimal Time for Closing a Trading Position
In this paper, trading rules (strategies) on a specified financial asset at some future time are interpreted as contingent claims (financial derivatives). Therefore, their fair values are computable using the binomial tree technique. However, traders pay the price of financial asset at the current t...
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| Format: | Article |
| Language: | English |
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Athens Institute for Education and Research
2024-10-01
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| Series: | Athens Journal of Business & Economics |
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| Online Access: | https://www.athensjournals.gr/business/2024-10-4-4-Habibi.pdf |
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| author | Reza Habibi |
| author_facet | Reza Habibi |
| author_sort | Reza Habibi |
| collection | DOAJ |
| description | In this paper, trading rules (strategies) on a specified financial asset at some future time are interpreted as contingent claims (financial derivatives). Therefore, their fair values are computable using the binomial tree technique. However, traders pay the price of financial asset at the current time to enter to trading. Clearly, it is a loss for traders. In this paper, first, hedging strategies are proposed. Then, using three procedures the optimal time for closing the trading position are derived. Mentioned procedures are based on optimal stopping time and stochastic dynamic programming, state space and a practical procedure which uses an adds-in of Excel software. Indeed, optimal closing time and related trading strategies are applied in discrete time price processes and in the binomial tree setting. Markov decision process (MDP) solution to the problem is proposed. Simulation results are studied and finally, a conclusion section is given. |
| format | Article |
| id | doaj-art-65feef8e983e4c6494ba6bb1b00b1fd9 |
| institution | Kabale University |
| issn | 2241-794X |
| language | English |
| publishDate | 2024-10-01 |
| publisher | Athens Institute for Education and Research |
| record_format | Article |
| series | Athens Journal of Business & Economics |
| spelling | doaj-art-65feef8e983e4c6494ba6bb1b00b1fd92024-12-28T15:21:19ZengAthens Institute for Education and ResearchAthens Journal of Business & Economics2241-794X2024-10-0110430931810.30958/ajbe.10-4-4Optimal Time for Closing a Trading Position Reza Habibi0Faculty Member, Iran Banking Institute, Central Bank of Iran, Tehran, IranIn this paper, trading rules (strategies) on a specified financial asset at some future time are interpreted as contingent claims (financial derivatives). Therefore, their fair values are computable using the binomial tree technique. However, traders pay the price of financial asset at the current time to enter to trading. Clearly, it is a loss for traders. In this paper, first, hedging strategies are proposed. Then, using three procedures the optimal time for closing the trading position are derived. Mentioned procedures are based on optimal stopping time and stochastic dynamic programming, state space and a practical procedure which uses an adds-in of Excel software. Indeed, optimal closing time and related trading strategies are applied in discrete time price processes and in the binomial tree setting. Markov decision process (MDP) solution to the problem is proposed. Simulation results are studied and finally, a conclusion section is given. https://www.athensjournals.gr/business/2024-10-4-4-Habibi.pdfbinomial treefair valuefinancial derivativeexcelhedgingmdpoptimal stoppingstate space modelstochastic dynamic programmingtrading strategies |
| spellingShingle | Reza Habibi Optimal Time for Closing a Trading Position Athens Journal of Business & Economics binomial tree fair value financial derivative excel hedging mdp optimal stopping state space model stochastic dynamic programming trading strategies |
| title | Optimal Time for Closing a Trading Position |
| title_full | Optimal Time for Closing a Trading Position |
| title_fullStr | Optimal Time for Closing a Trading Position |
| title_full_unstemmed | Optimal Time for Closing a Trading Position |
| title_short | Optimal Time for Closing a Trading Position |
| title_sort | optimal time for closing a trading position |
| topic | binomial tree fair value financial derivative excel hedging mdp optimal stopping state space model stochastic dynamic programming trading strategies |
| url | https://www.athensjournals.gr/business/2024-10-4-4-Habibi.pdf |
| work_keys_str_mv | AT rezahabibi optimaltimeforclosingatradingposition |