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Title
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Analytic models for parameter dependency in option price modelling
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Author
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Abstract
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| Options are a type of financial instrument classed as derivatives, as they derive their value from an underlying asset. The equations used to model the option price are often expressed as partial differential equations (PDEs). Once expressed in this form, a discretization method on a finite grid can be applied and the numerical valuation obtained. Remains the problem of writing down an (approximate) closed-form analytic model for the option price in function of all the variables and parameters, which is the main objective of this paper. At the same time we also consider the Greeks, which are the quantities representing the sensitivities of the price to a change in the underlying variables or parameters. Discrete values for these Greeks can again be derived, either directly from the differentiation matrices occurring in the option price PDE or by solving new but similar PDEs. Next, analytic models for the Greeks are computed in the same way as for the option price. As a prototype case, The Black-Scholes PDE for European call options is considered. |
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Language
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English
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Source (journal)
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Numerical algorithms. - Basel, 1991, currens
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Publication
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Basel
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2016
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ISSN
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1017-1398
[print]
1572-9265
[online]
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DOI
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10.1007/S11075-015-0084-5
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Volume/pages
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73
:1
(2016)
, p. 15-31
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ISI
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000382145200002
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Full text (Publisher's DOI)
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Full text (open access)
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Full text (publisher's version - intranet only)
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