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Option Strategies with linear programming

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Author Info

  • Christos Papahristodoulou

    (Mälardalen University, School of Business)

Abstract

In practice, all option strategies are decided in advance, given the investor’s belief of the stock price. In this paper, instead of deciding in advance the most appropriate hedging option strategy, an LP problem is formulated, by considering all significant Greek parameters of the Black-Scholes formula, such as delta, gamma, theta, rho and kappa. The optimal strategy to select will be simply decided by the solution of that model. The LP model is applied to Ericsson’s call and puts options.

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File URL: http://128.118.178.162/eps/fin/papers/0505/0505005.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0505005.

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Date of creation: 04 May 2005
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Handle: RePEc:wpa:wuwpfi:0505005

Note: Type of Document - pdf. Published in European Journal of Operational research 157 (2004) 246-256
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Web page: http://128.118.178.162

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Keywords: Finance; option portfolios; Linear programming;

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  1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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Cited by:
  1. Gao, Pei-wang, 2009. "Options strategies with the risk adjustment," European Journal of Operational Research, Elsevier, vol. 192(3), pages 975-980, February.
  2. Sinha, Pankaj & Gupta, Akshay & Mudgal, Hemant, 2010. "Active Hedging Greeks of an Options Portfolio integrating churning and minimization of cost of hedging using Quadratic & Linear Programing," MPRA Paper 25707, University Library of Munich, Germany.
  3. Sinha, Pankaj & Johar, Archit, 2010. "Hedging Greeks for a portfolio of options using linear and quadratic programming," MPRA Paper 20834, University Library of Munich, Germany.

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