Computation of Greeks using Binomial Tree

Yoshifumi Muroi and Shintaro Suda

No 117, TMARG Discussion Papers from Graduate School of Economics and Management, Tohoku University

Abstract: This paper proposes a new efficient algorithm for the computation of Greeks for options using the binomial tree. We also show that Greeks for European options introduced in this article are asymptotically equivalent to the discrete version of Malliavin Greeks. This fact enables us to show that our Greeks converge to Malliavin Greeks in the continuous time model. The computation algorithms of Greeks for American options using the binomial tree is also given in this article. There are three advantageous points to use binomial tree approach for the computation of Greeks. First, mathematics is much simpler than using the continous time Malliavin calculus approach. Second, we can construct a simple algorithm to obtain the Greeks for American options. Third, this algorithm is very efficient because one can compute the price and Greeks (delta, gamma, vega, and rho) at once. In spite of its importance, only a few previous studies on the computation of Greeks for American options exist, because performing sensitivity analysis for the optimal stopping problem is difficult. We believe that our method will become one of the popular ways to compute Greeks for options.

Pages: 30 pages
Date: 2014-10
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:toh:tmarga:117

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