Simulated Greeks for American Options

30 Pages Posted: 6 Jan 2020

See all articles by Pascal Letourneau

Pascal Letourneau

University of Wisconsin - Whitewater

Lars Stentoft

Department of Economics, University of Western Ontario; Center for Interuniversity Research and Analysis on Organization (CIRANO); Aarhus University - CREATES

Date Written: December 14, 2019

Abstract

This paper considers estimation of price sensitivities, so-called Greeks, for American style options using flexible simulation methods combined with initial dispersed state variables. The asymptotic properties of the estimators are studied and convergence of the method is established under mild regularity conditions. A 2-step method is proposed with an adaptive choice of optimal initially dispersed state variables, that controls and balances off the bias of the estimates against their variance. Numerical results show that the method works extremely well for very reasonable choices of spread sizes, regressors, and simulated paths and demonstrate that the proposed method compares well to existing alternatives.

Keywords: Hedging, Least Squares Monte Carlo method, Price sensitivities

JEL Classification: C15, G12, G13

Suggested Citation

Letourneau, Pascal and Stentoft, Lars, Simulated Greeks for American Options (December 14, 2019). Available at SSRN: https://ssrn.com/abstract=3503889 or http://dx.doi.org/10.2139/ssrn.3503889

Pascal Letourneau

University of Wisconsin - Whitewater ( email )

Whitewater, WI 53190
United States

Lars Stentoft (Contact Author)

Department of Economics, University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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