ALGORITHMIC DIFFERENTIATION FOR DISCONTINUOUS PAYOFFS

Roberto Daluiso and Giorgio Facchinetti ()
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Roberto Daluiso: Interest Rate and Credit Models, Banca IMI, Largo Mattioli 6, 20100 Milan, Italy†Department of Statistics and Quantitative Methods, Milano-Bicocca University, U7 Building, Via Bicocca degli Arcimboldi 8, 20126 Milan, Italy
Giorgio Facchinetti: Interest Rate and Credit Models, Banca IMI, Largo Mattioli 6, 20100 Milan, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2018, vol. 21, issue 04, 1-41

Abstract: We present a general technique to compute the sensitivities of the Monte Carlo prices of discontinuous financial products. It is a natural extension of the pathwise adjoints method, which would require an almost-surely differentiable payoff; the efficiency of the latter method when many sensitivities must be calculated is preserved. We show empirically that the new algorithm is competitive in terms of accuracy and execution time when compared to benchmarks obtained by smoothing of the payoff, which benchmarks are biased and require a nonobvious tuning of their parameters.

Keywords: Sensitivities; Greeks; algorithmic differentiation; adjoints; pathwise differentiation; derivatives pricing; discontinuous payoffs; digital options; barrier options (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S021902491850019X

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