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

Pankaj Sinha, Akshay Gupta and Hemant Mudgal

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Options Portfolio; Hedging Greeks; Churning of Portfolio; Linear Programing; Transaction Cost (search for similar items in EconPapers)
JEL-codes: C02 C61 G11 (search for similar items in EconPapers)
Date: 2010-10-02
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Related works:
Journal Article: Active Hedging Greeks of an Options Portfolio Integrating Churning and Minimization of Cost of Hedging Using Quadratic & Linear Programing (2010)
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