Computational Management Science

, Volume 9, Issue 1, pp 31–62

Robust international portfolio management

  • Raquel J. Fonseca
  • Wolfram Wiesemann
  • Berç Rustem
Original Paper

DOI: 10.1007/s10287-011-0132-0

Cite this article as:
Fonseca, R.J., Wiesemann, W. & Rustem, B. Comput Manag Sci (2012) 9: 31. doi:10.1007/s10287-011-0132-0

Abstract

We present an international portfolio optimization model where we take into account the two different sources of return of an international asset: the local returns denominated in the local currency, and the returns on the foreign exchange rates. The explicit consideration of the returns on exchange rates introduces non-linearities in the model, both in the objective function (return maximization) and in the triangulation requirement of the foreign exchange rates. The uncertainty associated with both types of returns is incorporated directly in the model by the use of robust optimization techniques. We show that, by using appropriate assumptions regarding the formulation of the uncertainty sets, the proposed model has a semidefinite programming formulation and can be solved efficiently. While robust optimization provides a guaranteed minimum return inside the uncertainty set considered, we also discuss an extension of our formulation with additional guarantees through trading in quanto options for the foreign assets and in equity options for the domestic assets.

Keywords

Semidefinite programming Robust optimization International portfolio optimization Risk management Quanto options 

Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  • Raquel J. Fonseca
    • 1
  • Wolfram Wiesemann
    • 1
  • Berç Rustem
    • 1
  1. 1.Department of ComputingImperial College of Science, Technology and MedicineLondonUK

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