Sunday, May 18, 2008

Greeks Estimated at a Point and Point Alone

In the real world fiance is not continuous time fiance. Therefore looking at the Greeks at a point of time would not be ideal. With discrete movements of stock price, interest rates and even historic volatility, the actual impact of the Greeks to a model would be different than anticipated.
 
Ideally to overcome this situation:
  1. The Greeks should be empirically estimated. Intra day data can be used to estimate delta, gamma assuming time to expiration and volatility does not change much. In the case of volatility it is worth while to see that the implied volatilises also does not change much from previous to ensure that this assumption holds
  2. Based on expected distribution of discrete market events and calculate the expected dicretised version of the Greek. This is needed due to the instability of the Greeks due to its payoff structure, especially when considering exotics.

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Thanking you.
Best regards,
Suminda Sirinath Salpitikorala Dharmasena B.Sc. (Hon.) Comp. & I.S., Lon.
The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honours the servant and has forgotten the gift. - Albert Einstein
(c) Suminda Sirinath Salpitikorala Dharmasena. All rights reserved.
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