IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789814407519_0007.html
   My bibliography  Save this book chapter

Option Portfolio Management as a Chance Constrained Problem

In: Stochastic Programming Applications in Finance, Energy, Planning and Logistics

Author

Listed:
  • Dmitry Golembiovsky

    (Department of Risks, Bank ZENIT, Moscow Financial-Industrial University “Sinergy” 9, Banny Lane, Moscow 129110, Russia)

  • Anatoliy Abramov

    (Department of Risks, Bank ZENIT, Moscow Financial-Industrial University “Sinergy” 9, Banny Lane, Moscow 129110, Russia)

Abstract

In a risk-neutral world the price of an option is equal to its expected payoff discounted at the risk-free interest rate. So, the expected return from investment in any static option portfolio corresponds with the risk-free rate. However, it is possible to manage the portfolio dynamically in such a way that it provides higher return with a probability close to unity and lower return (possibly large negative return) with a given low probability. For this purpose stochastic programming with chance constraints can be used.In the paper the problem of option portfolio management is investigated. The hypothetical market considered includes European options expiring in the nearest month. It is a risk-neutral market where the underlying asset follows a geometric Brownian motion and prices of all options are calculated on the basis of the Black-Scholes formula. A stochastic chance constrained program for option portfolio management is developed along with the corresponding multinomial scenario tree.The results of a Monte-Carlo simulation of the portfolio management are presented. They confirm that it is possible to make more than the risk-free return in a risk-neutral options market.

Suggested Citation

  • Dmitry Golembiovsky & Anatoliy Abramov, 2013. "Option Portfolio Management as a Chance Constrained Problem," World Scientific Book Chapters, in: Horand I Gassmann & William T Ziemba (ed.), Stochastic Programming Applications in Finance, Energy, Planning and Logistics, chapter 7, pages 155-172, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814407519_0007
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789814407519_0007
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789814407519_0007
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789814407519_0007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.