  The problem of stock hedging is reconsidered in this paper, where a put
option is chosen from a set of available put options to hedge the market risk
of a stock. A formula is proposed to determine the probability that the
potential loss exceeds a predetermined level of Value-at-Risk, which is used to
find the optimal strike price and optimal hedge ratio. The assumptions that the
chosen put option finishes in-the-money and the constraint of hedging budget is
binding are relaxed in this paper. A hypothesis test is proposed to determine
whether the failure rate of hedging strategy is greater than the predetermined
level of risk. The performances of the proposed method and the method with
those two assumptions are compared through simulations. The results of
simulated investigations indicate that the proposed method is much more prudent
than the method with those two assumptions.
