Pricing and hedging high-dimensional American options

an irregular grid approach

S. Berridge, H. Schumacher

Research output: Chapter in Book/Report/Conference proceedingConference contributionProfessional

Abstract

We propose and test a new method for pricing American options in a high dimensional setting. The method is centred around the approximation of the associated variational inequality on an irregular grid. We approximate the partial differential operator on this grid by appealing to the SDE representation of the stock process and computing the logarithm of the transition probability matrix of an approximating Markov chain. The option price is computed as a function of the underlyings, thus allowing for computation of deltas. The results of numerical tests in five dimensions are promising.
Original languageEnglish
Title of host publication[n.n.]
PublisherUnknown Publisher
Pages13
Number of pages13
Publication statusPublished - 2002

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Grid
Hedging
American options
Pricing
Approximation
American option pricing
Option prices
Transition probability
Variational inequalities
Stochastic differential equations
Operator

Cite this

Berridge, S., & Schumacher, H. (2002). Pricing and hedging high-dimensional American options: an irregular grid approach. In [n.n.] (pp. 13). Unknown Publisher.
Berridge, S. ; Schumacher, H. / Pricing and hedging high-dimensional American options : an irregular grid approach. [n.n.]. Unknown Publisher, 2002. pp. 13
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Berridge, S & Schumacher, H 2002, Pricing and hedging high-dimensional American options: an irregular grid approach. in [n.n.]. Unknown Publisher, pp. 13.

Pricing and hedging high-dimensional American options : an irregular grid approach. / Berridge, S.; Schumacher, H.

[n.n.]. Unknown Publisher, 2002. p. 13.

Research output: Chapter in Book/Report/Conference proceedingConference contributionProfessional

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AB - We propose and test a new method for pricing American options in a high dimensional setting. The method is centred around the approximation of the associated variational inequality on an irregular grid. We approximate the partial differential operator on this grid by appealing to the SDE representation of the stock process and computing the logarithm of the transition probability matrix of an approximating Markov chain. The option price is computed as a function of the underlyings, thus allowing for computation of deltas. The results of numerical tests in five dimensions are promising.

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Berridge S, Schumacher H. Pricing and hedging high-dimensional American options: an irregular grid approach. In [n.n.]. Unknown Publisher. 2002. p. 13