Title
Efficient computation of option price sensitivities for options of American style Efficient computation of option price sensitivities for options of American style
Author
Faculty/Department
Faculty of Sciences. Mathematics and Computer Science
Publication type
article
Publication
Subject
Economics
Mathematics
Source (journal)
Wilmott
Volume/pages
(2004) , p. 72-81
ISSN
1540-6962
Carrier
E
Target language
English (eng)
Abstract
No front-office software can survive without providing derivatives of option prices with respect to underlying market or model parameters, the so called Greeks. If a closed form solution for an option exists, Greeks can be computed analytically and they are numerically stable. However, for American style options, there is no closed-form solution. The price is computed by binomial trees, finite difference methods or an analytic approximation. Taking derivatives of these prices leads to instable numerics or misleading results, specially for Greeks of higher order. We compare the computation of the Greeks in various pricing methods and conclude with the recommendation to use Leisen-Reimer trees.
E-info
https://repository.uantwerpen.be/docman/iruaauth/0a73ef/ee635e97154.pdf