IDEAS home Printed from https://ideas.repec.org/a/buc/jpredm/v4y2010i2p1-14.html
   My bibliography  Save this article

Active Hedging Greeks of an Options Portfolio Integrating Churning and Minimization of Cost of Hedging Using Quadratic & Linear Programing

Author

Listed:
  • Pankaj Sinha
  • Akshay Gupta
  • Hemant Mudgal

Abstract

This 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.

Suggested Citation

  • 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.
  • Handle: RePEc:buc:jpredm:v:4:y:2010:i:2:p:1-14
    as

    Download full text from publisher

    File URL: http://www.ingentaconnect.com/content/ubpl/jpm/2010/00000004/00000002/art00001
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Papahristodoulou, Christos, 2004. "Option strategies with linear programming," European Journal of Operational Research, Elsevier, vol. 157(1), pages 246-256, August.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • 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

    Statistics

    Access and download statistics

    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:buc:jpredm:v:4:y:2010:i:2:p:1-14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross). General contact details of provider: http://www.ubpl.co.uk/ .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.