Author : Bijan Sadighi
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (14 download)
Book Synopsis Computing Risk Sensitivities for Swing Options by : Bijan Sadighi
Download or read book Computing Risk Sensitivities for Swing Options written by Bijan Sadighi and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The robust and efficient computation of risk sensitivities in Monte Carlo simulations is a topic of great practical relevance. The standard approach to compute risk sensitivities in a Monte Carlo simulation, the finite difference estimator, is known to be computationally inefficient and biased. In this paper we apply several alternative numerical techniques for the estimation of risk sensitivities to swing options, which are a class of multi-exercisable Bermudan options. The used estimators include the pathwise method, the likelihood ratio method, hybrid combinations of the two methods as well as the Modified Least Squares Monte Carlo method. With these techniques we estimate deltas and gammas for upswing and downswing options under two different stochastic processes. All estimation methods can be successfully applied to swing options and provide accurate risk sensitivities. We find that the pathwise method exhibits the lowest bias and standard error for the estimation of delta while the hybrid estimators produce the best results for the estimation of gamma. On the other hand, the likelihood ratio method and the Modified Least Squares method are not able to outperform the finite difference method. Eventually, we apply the risk sensitivity estimators to a dynamic hedging simulation for swing options in which all estimators demonstrate stable results.