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Active Hedging Greeks of an Options Portfolio integrating churning and minimization of cost of hedging using Quadratic & Linear Programing

Author

Listed:
  • Sinha, Pankaj
  • Gupta, Akshay
  • Mudgal, Hemant

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

  • 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.
    • Handle: RePEc:pra:mprapa:25707
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    File URL: https://mpra.ub.uni-muenchen.de/25707/1/MPRA_paper_25707.pdf
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    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)

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    More about this item

    Keywords

    Options Portfolio; Hedging Greeks; Churning of Portfolio; Linear Programing; Transaction Cost;
    All these keywords.

    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

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