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Optimal Investment Strategy for Kinked Utility Maximization: Covered Call Option Strategy

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DOI: 10.4236/jmf.2014.42006    3,829 Downloads   6,285 Views   Citations

ABSTRACT

This paper describes optimal investment strategies for kinked utility functions. One example is a CRRA utility function with a kink at a maximum wealth, which leads a covered call “like” strategy and the other is a CRRA utility function with a kink at a minimum wealth, which leads a protective put “like” strategy. This paper introduces analytic mathematical solutions providing a mathematical explanation of a dual utility where Black-Sholes assumption is utilized in the solutions. The intuitive solutions are clear for cases of those kinked utilities but minute mathematical explanation is described. Also a numerical simulation is performed for a covered call like strategy case.

Cite this paper

M. Yamashita, "Optimal Investment Strategy for Kinked Utility Maximization: Covered Call Option Strategy," Journal of Mathematical Finance, Vol. 4 No. 2, 2014, pp. 55-74. doi: 10.4236/jmf.2014.42006.

Conflicts of Interest

The authors declare no conflicts of interest.

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