SEARCH

SEARCH BY CITATION

Keywords:

  • margin;
  • option;
  • portfolio;
  • network;
  • flow

Abstract

As shown in [23], 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 uses 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. © 2011 Wiley Periodicals, Inc. NETWORKS, 2012