Università degli Studi di Padova

“Chebyshev Greeks: Smoothing Gamma without Bias”

Venerdì 29 Ottobre 2021, ore 14:30 - Aula 2BC30 e Zoom - Andrea Pallavicini (Imperial College London and Banca IMI)


The computation of Greeks is a fundamental task for risk managing of financial instruments. The standard approach to their numerical evaluation is via finite differences. Most exotic derivatives are priced via Monte Carlo simulation: in these cases, it is hard to find a fast and accurate approximation of Greeks, mainly because of the need of a tradeoff between bias and variance. Recent improvements in Greeks computation, such as Adjoint Algorithmic Differentiation, are unfortunately uneffective on second order Greeks (such as Gamma), which are plagued by the most significant instabilities, so that a viable alternative to standard finite differences is still lacking. We apply Chebyshev interpolation techniques to the computation of spot Greeks, showing how to improve the stability of finite difference Greeks of arbitrary order, in a simple and general way. The increased performance of the proposed technique is analyzed for a number of real payoffs commonly traded by financial institutions.

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Seminars in Probability and Finance