European Option General First Order Error Formula

Guillaume Leduc

MPRA Paper from University Library of Munich, Germany

Abstract: We study the value of European security derivatives in the Black-Scholes model when the underlying asset ξ is approximated by random walks ξ⁽ⁿ⁾. We obtain an explicit error formula, up to a term of order O(n^{-(3/2)}), which is valid for general approximating schemes and general payoff functions. We show how this error formula can be used to find random walks ξ⁽ⁿ⁾ for which option values converge at a speed of O(n^{-(3/2)}).

Keywords: European options; approximation scheme; error formula; Black-Scholes (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2012-05-10, Revised 2012-10-01
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Citations: View citations in EconPapers (2)

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