Efficient Computation of Hedging Parameters for Discretely Exercisable Options

45 Pages Posted: 18 Mar 2005

See all articles by Ron Kaniel

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Stathis Tompaidis

University of Texas at Austin - McCombs School of Business

Alexander Zemlianov

University of Texas at Austin - Electrical and Computer Engineering Department

Date Written: July 2006

Abstract

We propose an algorithm to calculate confidence intervals for the values of hedging parameters of discretely exercisable options using Monte-Carlo simulation. The algorithm is based on a combination of the duality formulation of the optimal stopping problem for pricing discretely exercisable options and Monte-Carlo estimation of hedging parameters for European options. We show that the width of the confidence interval for a hedging parameter decreases, with an increase in the computer budget, asymptotically at the same rate as the width of the confidence interval for the price of the option. The method can handle arbitrary payoff functions, general diffusion processes, and a large number of random factors. We also present a fast, heuristic, alternative method and use our method to evaluate its accuracy.

Keywords: Option pricing, greeks, monte carlo simulation, american options

Suggested Citation

Kaniel, Ron and Tompaidis, Stathis and Zemlianov, Alexander, Efficient Computation of Hedging Parameters for Discretely Exercisable Options (July 2006). Available at SSRN: https://ssrn.com/abstract=680703 or http://dx.doi.org/10.2139/ssrn.680703

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Stathis Tompaidis (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Alexander Zemlianov

University of Texas at Austin - Electrical and Computer Engineering Department ( email )

2317 Speedway
Austin, TX 78712
United States

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