Centre for Discrete and Applicable Mathematics
	CDAM Research Report, LSE-CDAM-99-04 May 1999

Abstract

In this paper we study the optimal timing of management meetings at which risk management (hedging) decisions are taken with respect to a real options position. Unlike earlier research, which typically exogenously assumes a periodic meeting schedule, our model allows for flexible (non periodic) scheduling of meetings. We show that if unit meeting costs are constant (no matter whether they are scheduled in a periodic fashion or not), periodicity is unlikely to be optimal. However, when we relax the cost constancy condition we are able to derive parametrically a critical cost frontier above which the net returns from periodicity always dominate. That is, the issue of whether periodic scheduling of meetings is optimal is settled via comparison of actual costs to the computed critical cost bound. At first sight, our results may seem to be consistent with the simple intuition that as risk increases, more meetings should be set, and, eventually, scheduling policy be updated from a periodic to a flexible basis. However, working within an optimization framework we are able to show that such seemingly intuitive claims are of restricted validity. We show that, for certain ranges of parameter values, increasing risk does indeed necessitate a shift from periodic to flexible scheduling, but critically, simultaneously the optimal response is to reduce meeting frequency, as compared to the previous periodic regime. Thus, our model contributes to an understanding of how rich the set of potential meeting policies needs to be in order to obtain optimality.

A compressed (gzip) PostScript file (137 kB) with the full contents of this report can be downloaded by clicking here; for technical reason, it is not possible to have the figures available in electronic format.

Alternatively, if you like a free hard copy of this report, please send the number of this report, LSE-CDAM-99-04, together with your name and postal address to:

		CDAM Research Reports Series Centre for Discrete and Applicable Mathematics London School of Economics Houghton Street London WC2A 2AE, U.K.
		Phone: +44(0)-171-955 7732. Fax: +44(0)-171-955 6877. Email: info@maths.lse.ac.uk

		Introduction to the CDAM Research Report Series.
		CDAM Homepage.

Last changed: Wed 9 Feb 2005
For comments go to: http://www.maths.lse.ac.uk/webmaster.html