Simulating the Greeks of American Options

P.A. (Phuong Anh) Nguyen
University of Minnesota
Friday, February 15, 2019 - 5:30pm to 6:30pm
Vincent Hall 16

Abstract: In this paper, we implement an efficient simulation-based method for estimating the Greeks of American options. We perform a least square regression to determine the optimal stopping rule that is applied to calculate the Greeks, which are derived via a path-wise derivative approach. We prove that this method provides asymptotically unbiased simulation estimators for the Greeks. In addition, we propose a boundary integral technique as a faster way to approximate gamma. This technique can also be used to calculate delta and theta. Our paper is the first to provide complete simulation-based approximations for all of the Greeks (delta, gamma, theta, rho, and vega) of American options. To make the computational process more efficient, we incorporate a Brownian Bridge into the numerical simulations. We then extend the application to American basket options.

Bio: P.A. Nguyen is a PhD candidate in the University of Minnesota's Industrial Systems Engineering (ISyE) Doctoral Program. She is working with Dr. Dan Mitchell whose focus is in the area of financial engineering, specifically applying stochastic control to problems in finance and quantitative risk management. P.A. is also an alumna of the Master of Financial Mathematics (MFM) at the University of Minnesota (2014) and is currently a teaching assistant for the MFM. She worked in enterprise risk management, primarily in credit risk and interest rate risk areas, for a few years before joining UMN’s ISyE PhD program.