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Optimal Partial Proxy Method for Computing Gammas of Financial Products with Discontinuous and Angular Payoffs

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  • Mark S. Joshi
  • Dan Zhu

Abstract

We extend the limit optimal partial proxy method to compute second-order sensitivities of financial products with discontinuous or angular payoffs by Monte Carlo simulation. The methodology is optimal in terms of minimizing the variance of the likelihood ratio weight. Applications are presented for both equity and interest-rate products with discontinuous payoff structures. The first-order optimal partial proxy method is also implemented to calculate the Hessians of insurance products with angular payoffs. Numerical results are presented which demonstrate the speed and efficacy of the method.

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  • Mark S. Joshi & Dan Zhu, 2016. "Optimal Partial Proxy Method for Computing Gammas of Financial Products with Discontinuous and Angular Payoffs," Applied Mathematical Finance, Taylor & Francis Journals, vol. 23(1), pages 22-56, March.
    • Handle: RePEc:taf:apmtfi:v:23:y:2016:i:1:p:22-56
    DOI: 10.1080/1350486X.2016.1156487
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    Cited by:

    1. Roberto Daluiso, 2023. "Fast and Stable Credit Gamma of CVA," Papers 2311.11672, arXiv.org.
    2. Frazier, David T. & Oka, Tatsushi & Zhu, Dan, 2019. "Indirect inference with a non-smooth criterion function," Journal of Econometrics, Elsevier, vol. 212(2), pages 623-645.

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