Active Hedging Greeks of an Options Portfolio integrating churning and minimization of cost of hedging using Quadratic & Linear Programing
AbstractThis paper proposes a methodology for active hedging Greeks of an option portfolio integrating churning and minimization of cost of hedging. In the first section, hedging strategy is implemented by taking positions in other available options, while simultaneously minimizing the net premium paid for the hedging and then churning the portfolio to take into account the changed value of Greeks in the new portfolio. In the second section, the paper extends the model to incorporate the transaction cost while hedging the portfolio and churning it in Indian Scenario. Both constant and nonlinear shape of transaction cost has been considered as per the Security Transaction Tax and Brokerage charges in India. A quadratic programming has been presented which has been approximated by a linear programming solution. The prototype software has been developed in MS Excel using Visual Basic.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 25707.
Date of creation: 02 Oct 2010
Date of revision:
Options Portfolio; Hedging Greeks; Churning of Portfolio; Linear Programing; Transaction Cost;
Other versions of this item:
- Pankaj Sinha & Akshay Gupta & Hemant Mudgal, 2010. "Active Hedging Greeks of an Options Portfolio Integrating Churning and Minimization of Cost of Hedging Using Quadratic & Linear Programing," Journal of Prediction Markets, University of Buckingham Press, vol. 4(2), pages 1-14, September.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-23 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sinha, Pankaj & Johar, Archit, 2010.
"Hedging Greeks for a portfolio of options using linear and quadratic programming,"
20834, University Library of Munich, Germany.
- Pankaj Sinha & Archit Johar, 2010. "Hedging Greeks for a Portfolio of Options Using Linear and Quadratic Programming," Journal of Prediction Markets, University of Buckingham Press, vol. 4(1), pages 17-26, May.
- Papahristodoulou, Christos, 2004.
"Option strategies with linear programming,"
European Journal of Operational Research,
Elsevier, vol. 157(1), pages 246-256, August.
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