 WORST-CASE SCENARIOS FOR AMERICAN OPTIONSRobert Buff ()
International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 01, 25-58 Abstract: One approach to cope with uncertain diffusion parameters when pricing options portfolios is to identify the parameters$\hat p$in a subset$\mathbb C$of the parameter space which form the worst-case for a particular portfolio. For the sell-side, this leads to a nonlinear algorithm that maximizes the expected liability under the risk-neutral measure.$\hat p$depends on the portfolio under consideration. Moreover, the algorithm must take into account that the exposure to$\mathbb C$-risk changes when non-vanilla components such as barrier or American options knock out or are exercised early. In this paper, we describe techniques to price portfolios with American options under worst-case scenarios based on uncertain volatility models. We also present heuristics which reduce the computational complexity that arises from the necessity to consider many early exercise combinations at a time. These heuristics reduce the compute time by almost one half. Date: 2000 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:03:y:2000:i:01:n:s0219024900000036 Ordering information: This journal article can be ordered from DOI: 10.1142/S0219024900000036 Access Statistics for this article International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd. |
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