Spring 2010 UMASS Amherst
Operations Research / Management Science Seminar Series

Speaker: Professor Dmytro Matsypura

Faculty of Economics and Business
Discipline of Operations Management and Econometrics
University of Sydney
Sydney, Australia

Biography: Dr. Dmytro Matsypura is a tenured faculty member at the University of Sydney, Australia. He has a B.Sc. and M.Sc. (both in Information Systems in Management) from the Kiev Polytechnic Institute in Ukraine and a Ph.D. in Business Administration with a concentration in Management Science, which he received in 2006, from UMass Amherst. His research is multidisciplinary and combines his background and interests in management, engineering, computer systems, and applied mathematics. His general area of research is in mathematical modeling and combinatorial optimization methods with applications to risk management problems in the investment industry and complex decision-making on global supply chain network systems. The methodological tools that he utilizes are: combinatorial optimization, variational inequalities, dynamical systems, network theory, multicriteria decision-making, and game theory. Dr. Matsypura has published in such journals as Transportation Research E, the International Journal of Production Research, Mathematical and Computer Modelling, and the International Journal of Emerging Electric Power Systems and has contributed several invited book chapters.

Abstract: Margining accounts, i.e., the calculation of minimum regulatory margin requirements for margin accounts, is a critical intra-day and end-of-day risk management operation in the list of mandatory activities of any prime brokerage firm. Margining an account without positions in options or other derivatives is simply the calculation of the total margin requirement for all positions in the account. Options, however, bring a nontrivial combinatorial component to the calculation because margin regulations for positions in options permit the use of different hedging strategies for margin reductions. Hedging strategies usually imitate trading strategies designed for margin trading. Hedging strategies involving only options are called option spreads.

In December 2005, the U.S. Securities and Exchange Commission approved margin rules for complex option spreads with 5, 6, 7, 8, 9, 10 and 12 legs (positions in options). Only basic option spreads with 2, 3 or 4 legs were recognized before. Taking advantage of option spreads with a large number of legs substantially reduces margin requirements and, at the same time, adequately estimates risk for margin accounts with positions in options. This talk presents combinatorial models for option spreads with any number of legs and proposes their full characterization in terms of matchings, alternating cycles and chains in colored graphs. We show that the combinatorial analysis of option spreads reveals powerful hedging mechanisms in the structure of margin accounts. We also give recommendations on how to create more efficient margin rules for options.