Computing Greeks: A Drift-Adjustment Technique for European and Asian Style Derivatives

Abstract:     
The paper introduces a method which reduces the computation of the Greeks back to a similar problem as of computing the price of the derivative in question; that is, if there is an efficient algorithm pricing the derivative then in order to compute the Greeks we will use the same efficient algorithm only with a modfied payoff function. The method is based on a Girsanov type drift adjustment technique. This technique transforms the expression of (a function of) the price of the derivative under yet another measure. These expressions can then be computed using the same numerical techniques as for calculating the price of derivative securities.

Number of Pages in PDF File: 15

Keywords: derivatives, girsanov, algorithm, securities

JEL Classification: G13, C63

working papers series