The knapsack problem approach in solving partial hedging problems of options

En option är ett finansiellt kontrakt som ger dess innehavare en rättighet (men medför ingen skyldighet) att sälja eller köpa någonting (till exempel en aktie) till eller från säljaren av optionen till ett visst pris vid en bestämd tidpunkt i framtiden. Den som säljer optionen binder sig till att gå med på denna framtida transaktion ifall optionsinnehavaren längre fram bestämmer sig för att inlösa optionen. Säljaren av optionen åtar sig alltså en risk av att den framtida transaktion som optionsinnehavaren kan tvinga honom att göra visar sig vara ofördelaktig för honom. Frågan om hur säljaren kan skydda sig mot denna risk leder till intressanta optimeringsproblem, där målet är att hitta en optimal skyddsstrategi under vissa givna villkor. Sådana optimeringsproblem har studerats mycket inom finansiell matematik. Avhandlingen "The knapsack problem approach in solving partial hedging problems of options" inför en ytterligare synpunkt till denna diskussion: I en relativt enkel (ändlig och komplett) marknadsmodell kan nämligen vissa partiella skyddsproblem beskrivas som så kallade kappsäcksproblem. De sistnämnda är välkända inom en gren av matematik som heter operationsanalys. I avhandlingen visas hur skyddsproblem som tidigare lösts på andra sätt kan alternativt lösas med hjälp av metoder som utvecklats för kappsäcksproblem. Förfarandet tillämpas även på helt nya skyddsproblem i samband med så kallade amerikanska optioner.

Chelyabinsk CHP-3 “locked power” problem solving

All over the world power systems become bigger and bigger every day. New equipment is installed, new feeders are constructed, new power units are installed. Some old elements of the network, however, are not changed in time. As a result, “bottlenecks” for capacity transmission can occur. By locked power problem the situation when a power plant has installed capacity exceeding the power it can actually deliver is usually meant. Regime, scheme or even technical restrictions-related issues usually cause this kind of problem. It is really important, since from the regime point of view it is typical decision to have a mobile capacity reserve, in case of malfunctions. And, what can be even more significant, power plant owner (JSC Fortum in our case) losses his money because of selling less electrical energy. The goal of master`s thesis is to analyze the current state of Chelyabinsk power system and the CHP-3 (Combined Heat and Power plant) in particular in relation with it`s ability to deliver the whole capacity of the CHP in it`s existing state and also taking into consideration the prospect of power unit 3 installation by the fourth quarter of 2010. The thesis contains some general information about the UPS of Russia, CPS of Ural, power system of Chelyabinsk and the Chelyabinsk region itself. Then the CHP-3 is described from technical point of view with it`s equipment observation. Regimes for the nowadays power system and for the system after the power unit 3 installation are reviewed. The problems occurring are described and, finally, a solution is offered.

Pricing anomalies in the Finnish stock market

The aim of this thesis is to examine whether the pricing anomalies exists in the Finnish stock markets by comparing the performance of quantile portfolios that are formed on the basis of either individual valuation ratios, composite value measures or combined value and momentum indicators. All the research papers included in the thesis show evidence of value anomalies in the Finnish stock markets. In the first paper, the sample of stocks over the 1991-2006 period is divided into quintile portfolios based on four individual valuation ratios (i.e., E/P, EBITDA/EV, B/P, and S/P) and three hybrids of them (i.e. composite value measures). The results show the superiority of composite value measures as selection criterion for value stocks, particularly when EBITDA/EV is employed as earnings multiple. The main focus of the second paper is on the impact of the holding period length on performance of value strategies. As an extension to the first paper, two more individual ratios (i.e. CF/P and D/P) are included in the comparative analysis. The sample of stocks over 1993- 2008 period is divided into tercile portfolios based on six individual valuation ratios and three hybrids of them. The use of either dividend yield criterion or one of three composite value measures being examined results in best value portfolio performance according to all performance metrics used. Parallel to the findings of many international studies, our results from performance comparisons indicate that for the sample data employed, the yearly reformation of portfolios is not necessarily optimal in order to maximally gain from the value premium. Instead, the value investor may extend his holding period up to 5 years without any decrease in long-term portfolio performance. The same holds also for the results of the third paper that examines the applicability of data envelopment analysis (DEA) method in discriminating the undervalued stocks from overvalued ones. The fourth paper examines the added value of combining price momentum with various value strategies. Taking account of the price momentum improves the performance of value portfolios in most cases. The performance improvement is greatest for value portfolios that are formed on the basis of the 3-composite value measure which consists of D/P, B/P and EBITDA/EV ratios. The risk-adjusted performance can be enhanced further by following 130/30 long-short strategy in which the long position of value winner stocks is leveraged by 30 percentages while simultaneously selling short glamour loser stocks by the same amount. Average return of the long-short position proved to be more than double stock market average coupled with the volatility decrease. The fifth paper offers a new approach to combine value and momentum indicators into a single portfolio-formation criterion using different variants of DEA models. The results throughout the 1994-2010 sample period shows that the top-tercile portfolios outperform both the market portfolio and the corresponding bottom-tercile portfolios. In addition, the middle-tercile portfolios also outperform the comparable bottom-tercile portfolios when DEA models are used as a basis for stock classification criteria. To my knowledge, such strong performance differences have not been reported in earlier peer-reviewed studies that have employed the comparable quantile approach of dividing stocks into portfolios. Consistently with the previous literature, the division of the full sample period into bullish and bearish periods reveals that the top-quantile DEA portfolios lose far less of their value during the bearish conditions than do the corresponding bottom portfolios. The sixth paper extends the sample period employed in the fourth paper by one year (i.e. 1993- 2009) covering also the first years of the recent financial crisis. It contributes to the fourth paper by examining the impact of the stock market conditions on the main results. Consistently with the fifth paper, value portfolios lose much less of their value during bearish conditions than do stocks on average. The inclusion of a momentum criterion somewhat adds value to an investor during bullish conditions, but this added value turns to negative during bearish conditions. During bear market periods some of the value loser portfolios perform even better than their value winner counterparts. Furthermore, the results show that the recent financial crisis has reduced the added value of using combinations of momentum and value indicators as portfolio formation criteria. However, since the stock markets have historically been bullish more often than bearish, the combination of the value and momentum criteria has paid off to the investor despite the fact that its added value during bearish periods is negative, on an average.

The us subprime crisis and stock market integration: evidence from the BRICS

The aim of this study is to examine the level of stock market co-movement in the BRICS countries and three major industrialized countries (Japan, UK and USA). While analyzing the interdependence and integration of markets, two subsets are examined: before (2000 – 2007) and during the global financial crisis (2007-2011). Generally, interdependence across markets is likely to increase during a highly volatile period. This is problematic because if it were true, the main benefit of international diversification would be reduced at times when it is most needed. The results reveal the dominant role of the US financial markets over the examined time period. Empirical studies of this research paper indicate that cross-market linkages have become slightly stronger during the ongoing subprime crisis than before crisis. However, results also show that an investor may obtain some international diversification benefits by investing especially in the BRICS countries despite the fact of unstable economic condition and growing globalization.

Performance characteristic of moving average trading rules in the Finnish stock market

The thesis examines the profitability of DMAC trading rules in the Finnish stock market over the 1996-2012 period. It contributes to the existing technical analysis literature by comparing for the first time the performance of DMAC strategies based on individual stock trading portfolios to the performance of index trading strategies based on the trading on the index (OMX Helsinki 25) that consists of the same stocks. Besides, the market frictions including transaction costs and taxes are taken into account, and the results are reported from both institutional and individual investor’s perspective. Performance characteristic of DMAC rules are evaluated by simulating 19,900 different trading strategies in total for two non- overlapping 8-year sub-periods, and decomposing the full-sample-period performance of DMAC trading strategies into distinct bullish- and bearish-period performances. The results show that the best DMAC rules have predictive power on future price trends, and these rules are able to outperform buy-and-hold strategy. Although the performance of the DMAC strategies is highly dependent on the combination of moving average lengths, the best DMAC rules of the first sub-period have also performed well during the latter sub-period in the case of individual stock trading strategies. According to the results, the outperformance of DMAC trading rules over buy-and-hold strategy is mostly attributed to their superiority during the bearish periods, and particularly, during stock market crashes.

Interdependence of Emerging Eastern European stock markets

One of the main developments in the global economy during the past decades has been the growth of emerging economies. Projections for their long-term growth, changes in the investment climate, corporate transparency and demography point to an increasing role for these emerging economies in the global economy. Today, emerging economies are usually considered as financial markets offering opportunities for high returns, good risk diversification and improved return-to-risk ratios. However, researchers have noted that these advantages may be in decline because of the increasing market integration. Nevertheless, it is likely that certain financial markets and specific sectors will remain partially segmented and somewhat insulated from the global economy for the year to come. This doctoral dissertation investigates several stock markets in Emerging Eastern Europe (EEE), including the ones in Russia, Poland, Hungary, the Czech Republic, Bulgaria and Slovenia. The objective is to analyze the returns and financial risks in these emerging markets from international investor’s point of view. This study also examines the segmentation/integration of these financial markets and the possibilities to diversify and hedge financial risk. The dissertation is divided into two parts. The first includes a review of the theoretical background for the articles and a review of the literature on EEE stock markets. It includes an overview of the methodology and research design applied in the analysis and a summary of articles from the second part of this dissertation and their main findings. The second part consists of four research publications. This work contributes to studies on emerging stock markets in four ways. First, it adds to the body of research on the pricing of risk, providing new empirical evidence about partial stock market segmentation in EEE. The results suggest that the aggregate emerging market risk is a relevant driver for stock market returns and that this market risk can be used to price financial instruments and forecast their performance. Second, it contributes to the empirical research on the integration of stock markets, asset prices and exchange rates by identifying the relationships between these markets through volatility and asset pricing. The results show that certain sectors of stock markets in EEE are not as integrated as others. For example, the Polish consumer goods sector, the Hungarian telecommunications sector, and the Czech financial sector are somewhat isolated from their counterparts elsewhere in Europe. Nevertheless, an analysis of the impact of EU accession in 2004 on stock markets suggests that most of the EEE markets are becoming increasingly integrated with the global markets. Third, this thesis complements the scientific literature in the field of shock and volatility spillovers by examining the mechanism of spillover distribution among the EU and EEE countries. The results illustrate that spillovers in emerging markets are mostly from a foreign exchange to the stock markets. Moreover, the results show that the effects of external shocks on stock markets have increased after the enlargement of the EU in 2004. Finally, this study is unique because it analyzes the effects of foreign macroeconomic news on geographically closely related countries. The results suggest that the effects of macroeconomic announcements on volatility are significant and have effect that varies across markets and their sectors. Moreover, the results show that the foreign macroeconomic news releases, somewhat surprisingly, have a greater effect on the EEE markets than the local macroeconomic news. This dissertation has a number of implications for the industry and for practitioners. It analyses financial risk associated with investing in Emerging Eastern Europe. Investors may use this information to construct and optimize investment portfolios. Moreover, this dissertation provides insights for investors and portfolio managers considering asset allocation to protect value or obtain higher returns. The results have also implications for asset pricing and portfolio selection in light of macroeconomic news releases.

Performance of active portfolio management and the effect of stock market trend

Purpose of the study is to evaluate performance of active portfolio management and the effect of stock market trend on the performance. Theory of efficient markets states that market prices reflect all available information and that all investors share a common view of future price developments. This view gives little room for the success of active management, but the theory has been disputed – at least the level of efficiency. Behavioral finance has developed theories that identify irrational behavior patterns of investors. For example, investment decisions are not made independent of past market developments. These findings give reason to believe that also the performance of active portfolio management may depend on market developments. Performance of 16 Finnish equity funds is evaluated during the period of 2005 to 2011. In addition two sub periods are constructed, a bull market period and a bear market period. The sub periods are created by joining together the two bull market phases and the two bear market phases of the whole period. This allows for the comparison of the two different market states. Performance of the funds is measured with risk-adjusted performance by Modigliani and Modigliani (1997), abnormal return over the CAPM by Jensen (1968), and market timing by Henriksson and Merton (1981). The results suggested that in average the funds are not able to outperform the market portfolio. However, the underperformance was found to be lower than the management fees in average which suggests that portfolio managers are able to do successful investment decisions to some extent. The study revealed substantial dependence on the market trend for all of the measures. The risk-adjusted performance measure suggested that in bear markets active portfolio managers in average are able to beat the market portfolio but not in bull markets. Jensen´s alpha and the market timing model also showed striking differences between the two market states. The results of these two measures were, however, somewhat problematic and reliable conclusions about the performance could not be drawn.

Search and Paper SKU Analysis of Recipes Meeting EUPS Standard

The theoretical research of the study concentrated on finding theoretical frameworks to optimize the amount of needed stock keeping units (SKUs) in manufacturing industry. The goal was to find ways for a company to acquire an optimal collection of stock keeping units needed for manufacturing needed amount of end products. The research follows constructive research approach leaning towards practical problem solving. In the empirical part of this study, a recipe search tool was developed to an existing database used in the target company. The purpose of the tools was to find all the recipes meeting the EUPS performance standard and put the recipes in a ranking order using the data available in the database. The ranking of the recipes was formed from the combination of the performance measures and price of the recipes. In addition, the tool researched what kind of paper SKUs were needed to manufacture the best performing recipes. The tool developed during this process meets the requirements. It eases and makes it much faster to search for all the recipes meeting the EUPS standard. Furthermore, many future development possibilities for the tool were discovered while writing the thesis.

Characterisation of Laser Beam and Paper Material Interaction

It is known already from 1970´s that laser beam is suitable for processing paper materials. In this thesis, term paper materials mean all wood-fibre based materials, like dried pulp, copy paper, newspaper, cardboard, corrugated board, tissue paper etc. Accordingly, laser processing in this thesis means all laser treatments resulting material removal, like cutting, partial cutting, marking, creasing, perforation etc. that can be used to process paper materials. Laser technology provides many advantages for processing of paper materials: non-contact method, freedom of processing geometry, reliable technology for non-stop production etc. Especially packaging industry is very promising area for laser processing applications. However, there are only few industrial laser processing applications worldwide even in beginning of 2010´s. One reason for small-scale use of lasers in paper material manufacturing is that there is a shortage of published research and scientific articles. Another problem, restraining the use of laser for processing of paper materials, is colouration of paper material i.e. the yellowish and/or greyish colour of cut edge appearing during cutting or after cutting. These are the main reasons for selecting the topic of this thesis to concern characterization of interaction of laser beam and paper materials. This study was carried out in Laboratory of Laser Processing at Lappeenranta University of Technology (Finland). Laser equipment used in this study was TRUMPF TLF 2700 carbon dioxide laser that produces a beam with wavelength of 10.6 μm with power range of 190-2500 W (laser power on work piece). Study of laser beam and paper material interaction was carried out by treating dried kraft pulp (grammage of 67 g m-2) with different laser power levels, focal plane postion settings and interaction times. Interaction between laser beam and dried kraft pulp was detected with different monitoring devices, i.e. spectrometer, pyrometer and active illumination imaging system. This way it was possible to create an input and output parameter diagram and to study the effects of input and output parameters in this thesis. When interaction phenomena are understood also process development can be carried out and even new innovations developed. Fulfilling the lack of information on interaction phenomena can assist in the way of lasers for wider use of technology in paper making and converting industry. It was concluded in this thesis that interaction of laser beam and paper material has two mechanisms that are dependent on focal plane position range. Assumed interaction mechanism B appears in range of average focal plane position of 3.4 mm and 2.4 mm and assumed interaction mechanism A in range of average focal plane position of 0.4 mm and -0.6 mm both in used experimental set up. Focal plane position 1.4 mm represents midzone of these two mechanisms. Holes during laser beam and paper material interaction are formed gradually: first small hole is formed to interaction area in the centre of laser beam cross-section and after that, as function of interaction time, hole expands, until interaction between laser beam and dried kraft pulp is ended. By the image analysis it can be seen that in beginning of laser beam and dried kraft pulp material interaction small holes off very good quality are formed. It is obvious that black colour and heat affected zone appear as function of interaction time. This reveals that there still are different interaction phases within interaction mechanisms A and B. These interaction phases appear as function of time and also as function of peak intensity of laser beam. Limit peak intensity is the value that divides interaction mechanism A and B from one-phase interaction into dual-phase interaction. So all peak intensity values under limit peak intensity belong to MAOM (interaction mechanism A one-phase mode) or to MBOM (interaction mechanism B onephase mode) and values over that belong to MADM (interaction mechanism A dual-phase mode) or to MBDM (interaction mechanism B dual-phase mode). Decomposition process of cellulose is evolution of hydrocarbons when temperature is between 380- 500°C. This means that long cellulose molecule is split into smaller volatile hydrocarbons in this temperature range. As temperature increases, decomposition process of cellulose molecule changes. In range of 700-900°C, cellulose molecule is mainly decomposed into H2 gas; this is why this range is called evolution of hydrogen. Interaction in this range starts (as in range of MAOM and MBOM), when a small good quality hole is formed. This is due to “direct evaporation” of pulp via decomposition process of evolution of hydrogen. And this can be seen can be seen in spectrometer as high intensity peak of yellow light (in range of 588-589 nm) which refers to temperature of ~1750ºC. Pyrometer does not detect this high intensity peak since it is not able to detect physical phase change from solid kraft pulp to gaseous compounds. As interaction time between laser beam and dried kraft pulp continues, hypothesis is that three auto ignition processes occurs. Auto ignition of substance is the lowest temperature in which it will spontaneously ignite in a normal atmosphere without an external source of ignition, such as a flame or spark. Three auto ignition processes appears in range of MADM and MBDM, namely: 1. temperature of auto ignition of hydrogen atom (H2) is 500ºC, 2. temperature of auto ignition of carbon monoxide molecule (CO) is 609ºC and 3. temperature of auto ignition of carbon atom (C) is 700ºC. These three auto ignition processes leads to formation of plasma plume which has strong emission of radiation in range of visible light. Formation of this plasma plume can be seen as increase of intensity in wavelength range of ~475-652 nm. Pyrometer shows maximum temperature just after this ignition. This plasma plume is assumed to scatter laser beam so that it interacts with larger area of dried kraft pulp than what is actual area of beam cross-section. This assumed scattering reduces also peak intensity. So result shows that assumably scattered light with low peak intensity is interacting with large area of hole edges and due to low peak intensity this interaction happens in low temperature. So interaction between laser beam and dried kraft pulp turns from evolution of hydrogen to evolution of hydrocarbons. This leads to black colour of hole edges.

Varastonhallinnan ja tuotannonsuunnittelun kehittäminen paperitehdasympäristössä

Tämän diplomityön tavoitteena on kehittää erään paperitehtaan käyttöpääoman hallintaa tuotannonsuunnittelun ja varastonhallinnan keinoin. Tuotannonsuunnittelussa tutkitaan syklinpituuden vaikutusta lajinvaihtohylkyyn ja siitä aiheutuvan varastotason nousun hyötyjä ja haittoja. Tehtaan ylijäämätasot määritetään puolen vuoden aikajänteeltä ja pyritään löytämään kehitysehdotuksia niiden minimoimiseksi. Työssä keskitytään lisäksi satamasta palautettuihin rulliin ja haamurulliin. Työn aiheista tehdään nykytila-analyysit, joiden perusteella selvitetään kehityskohteet. Työssä hyödynnetään tehtaan omia tietojärjestelmiä osa-alueiden analysoimisessa. Analysoimisessa käytetään karkeasuunnitelmaa ja erilaisia raportteja varastoihin ja tuotantoon liittyen. Työn tulosten mukaan voidaan todeta, että syklinpituutta ei kannata varasto-ohjautuvalla tuotantomuodolla kasvattaa. Ylijäämiä syntyy paperiteollisuudessa vääjäämättä ja kyseisessä yrityksessä niiden hyödyntämisprosentit ovat varsin korkealla tasolla. Kokonaisuutena tehtaan käyttöpääoman hallinta on varsin hyvällä pohjalla eikä suuria toimintatapamuutoksia ole tarpeen tehdä. Satamapalautusongelman suuruudesta tehtaalla oli erilainen käsitys kuin asia todellisuudessaan oli. Työssä esitetään kehitysehdotuksia, joiden avulla ongelmaa voidaan edelleen pienentää ja saavuttaa konkreettisia säästöjä. Haamurullien määrä osoittautui minimaaliseksi.

Oikosulkumoottoreiden yhteisvarastointipalvelun verkostohyödyt

Tutkimuksen tavoitteena on tutkia oikosulkumoottoreiden yhteisvarastoinnista saavutettavia verkostohyötyjä asiakas-toimittaja verkostossa. Yleisesti yhteisvarastointi mielletään järkeväksi, mutta siitä saatavat hyödyt ovat usein vaikeita arvioida. Oikosulkumoottorit ovat kalliita, usein kriittisiä yrityksen tuotannon hyödykkeitä, joiden käyttöikä on jopa 30 vuotta. Tämä asettaa erityisvaatimuksia myös moottoreiden varastoinnille. Pitkä käyttöikä alentaa varaston kysyntää, kun taas niiden kriittisyys tuotannolle edellyttää varastointia. Tuotannon menetykset mielletään usein kestämättömän kalliiksi ja tämän vuoksi ajan saatossa lähivarastoihin on kerätty huomattavia moottorivarastoja. Työssä luotiin kunnossapidon, varastoinnin ja talouden teorian pohjalta viitekehys johon tukeutuen rakennettiin yhteisvarastointiverkoston kustannusmalli. Tämän jälkeen laadittiin palvelun piiriin kuuluvilta asiakkailta saaduin varastotiedoin vertailukustannuslaskelma, josta johdettiin yhteisvarastointiverkoston hyödyt. Laskennan tuloksissa havaittiin varastoitavien oikosulkumoottoreiden määrän ja kustannusten väheneminen.

Financial Slack and Bidding Firms’ Takeover Announcement Stock Returns – an Event Study

Despite the fact that the literature on mergers and acquisitions is extensive, relatively little effort has been made to examine the relationship between the acquiring firms’ financial slack and short-term post-takeover announcement abnormal stock returns. In this study, the case is made that the financial slack of a firm is not only an outcome of past business and financing activities but it also may affect the quality of acquisition decisions. We will hypothesize that the level of financial slack in a firm is negatively associated with the abnormal returns following acquisition announcements because slack reduces managerial discipline over the use of corporate funds and also because it may give rise to managerial self-serving behavior. In this study, financial slack is measured in terms of three financial statements ratios: leverage ratio, cash and equivalents to total assets ratio and free cash flow to total assets ratio. The data used in this paper is collected from two main sources. A list comprising 90 European acquisition announcements is retrieved from Thomson One Banker database. The stock price data and financial statements information for the respective firms is collected using Datastream. Our empirical analysis is two-fold. First, we conduct a two-sample t-test where we find that the most slack-rich firms experience lower abnormal returns than the most slack-poor firms in the event window [-1, +1], significant at 5% risk level. Second, we perform a cross sectional regression for sample firms using three financial statements ratios to explain cumulative abnormal returns (CAR). We find that leverage shows a statistically significant positive relationship with cumulative abnormal returns in event window [-1; +1] (significance 5%). Moreover, cash to total assets ratio showed a weak negative relationship with CAR (significant at 10%) in event window [-1; +1]. We conclude that our hypothesis for the inverse relationship between slack and abnormal returns receives empirical support. Based on the results of the event study we get empirical support for the hypothesis that the capital markets expect the acquisitions undertaken by slack-rich firms to more likely be driven by managerial self-serving behavior and hubris than do those undertaken by slackpoor firms, signaling possible agency problems and behavioral biases.