Dynamic Hedging Strategy for Market Risk Management

As the portfolio manager for a sovereign wealth fund, you are under pressure to improve the fund's risk management framework following a significant market downturn that prompted a reevaluation of your current strategies. Your fund is heavily invested in equities and commodities, and you have also introduced a long-term allocation to private equity. After analyzing various risk metrics, you are considering implementing a dynamic hedging strategy with options that could help mitigate losses during market stress. However, you must determine the best approach given the fund’s illiquid allocations and the potential costs associated with options.

Your chief risk officer has presented three different strategies for managing market risk that utilize options. You need to decide which strategy is optimal considering the constraints and objectives of the fund.