Efficient computation of option price sensitivities for options of American style

Christian Wallner and Uwe Wystup

No 1, CPQF Working Paper Series from Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF)

Abstract: No front-office software can survive without providing derivatives of option prices with respect to underlying market or model parameters, the so called Greeks. If a closed form solution for an option exists, Greeks can be computed analytically and they are numerically stable. However, for American style options, there is no closed-form solution. The price is computed by binomial trees, finite difference methods or an analytic approximation. Taking derivatives of these prices leads to instable numerics or misleading results, specially for Greeks of higher order. We compare the computation of the Greeks in various pricing methods and conclude with the recommendation to use Leisen-Reimer trees.

Keywords: American options; Greeks; Leisen-Reimer trees (search for similar items in EconPapers)
JEL-codes: C63 F31 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (13)

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