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FAST MONTE CARLO GREEKS FOR FINANCIAL PRODUCTS WITH DISCONTINUOUS PAY-OFFS

Authors


Mark Joshi, Centre for Actuarial Studies, Department of Economics, University of Melbourne, VIC 3010, Australia; e-mail: mark@markjoshi.com

Abstract

We introduce a new class of numerical schemes for discretizing processes driven by Brownian motions. These allow the rapid computation of sensitivities of discontinuous integrals using pathwise methods even when the underlying densities postdiscretization are singular. The two new methods presented in this paper allow Greeks for financial products with trigger features to be computed in the LIBOR market model with similar speed to that obtained by using the adjoint method for continuous pay-offs. The methods are generic with the main constraint being that the discontinuities at each step must be determined by a one-dimensional function: the proxy constraint. They are also generic with the sole interaction between the integrand and the scheme being the specification of this constraint.

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