• Speaker: Dmytro Matsypura, The University of Sydney
  • Title: Margining Option Portfolios by Network Flows
  • Location: Room V129, Mathematics Building (Callaghan Campus) The University of Newcastle
  • Time and Date: 2:00 pm, Tue, 24th Jan 2012
  • Abstract:

    Having been constructed as trading strategies, option spreads are also used in margin calculations for offsetting positions in options. All option spreads that appear in trading and margining practice have two, three or four legs. As shown in Rudd and Schroeder (Management Sci, 1982), the problem of margining option portfolios where option spreads with two legs are used for offsetting can be solved in polynomial time by network flow algorithms. However, spreads with only two legs do not provide sufficient accuracy in measuring risk. Therefore, margining practice also employs spreads with three and four legs. A polynomial-time solution to the extension of the problem where option spreads with three and four legs are also used for offsetting is not known. We propose a heuristic network-flow algorithm for this extension and present a computational study that demonstrates high efficiency of the proposed algorithm in margining practice.

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