The Binomial CEV Model and the Greeks
Abstract
This article compares alternative binomial approximation schemes for computing the option hedge ratios studied by Chung and Shackleton (2002), Chung, Hung, Lee, and Shih (2011), and Pelsser and Vorst (1994) under the lognormal assumption, but now considering the constant elasticity of variance (CEV) process proposed by Cox (1975) and using the continuous‐time analytical Greeks recently offered by Larguinho, Dias, and Braumann (2013) as the benchmarks. Among all the binomial models considered in this study, we conclude that an extended tree binomial CEV model with the smooth and monotonic convergence property is the most efficient method for computing Greeks under the CEV diffusion process because one can apply the two‐point extrapolation formula suggested by Chung et al. (2011). © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:90–104, 2017
Citing Literature
Number of times cited according to CrossRef: 4
- Jia‐Hau Guo, Lung‐Fu Chang, Repeated Richardson extrapolation and static hedging of barrier options under the CEV model, Journal of Futures Markets, 10.1002/fut.22100, 40, 6, (974-988), (2020).
- José Carlos Dias, João Pedro Vidal Nunes, Aricson Cruz, A note on options and bubbles under the CEV model: implications for pricing and hedging, Review of Derivatives Research, 10.1007/s11147-019-09164-x, (2019).
- Aricson Cruz, José Carlos Dias, Valuing American-style options under the CEV model: an integral representation based method, Review of Derivatives Research, 10.1007/s11147-019-09157-w, (2019).
- José Carlos Dias, João Pedro Vidal Nunes, Universal recurrence algorithm for computing Nuttall, generalized Marcum and incomplete Toronto functions and moments of a noncentral χ 2 random variable, European Journal of Operational Research, 10.1016/j.ejor.2017.08.002, 265, 2, (559-570), (2018).
