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Optimal liquidation of financial derivatives

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  • Chen, Jingnan

Abstract

We propose a two-period robust optimization model for portfolio liquidation under a cash requirement that finds the least costly liquidation strategy. The basic asset return is assumed to belong to a scaled ellipsoid while the derivative return is modeled as a quadratic function of the underlying asset return via delta-gamma approximation. We show that the robust liquidation model is equivalent to a computationally tractable semidefinite program. We obtain analytical properties regarding how derivative Greek letters affect the optimal liquidation strategy.

Suggested Citation

  • Chen, Jingnan, 2020. "Optimal liquidation of financial derivatives," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319300662
    DOI: 10.1016/j.frl.2019.07.006
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