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

Sinha, Pankaj and Gupta, Akshay and Mudgal, Hemant (2010): Active Hedging Greeks of an Options Portfolio integrating churning and minimization of cost of hedging using Quadratic & Linear Programing.

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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.

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