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Computing Greeks for L\'evy Models: The Fourier Transform Approach

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  • Federico De Olivera
  • Ernesto Mordecki

Abstract

The computation of Greeks for exponential L\'evy models are usually approached by Malliavin Calculus and other methods, as the Likelihood Ratio and the finite difference method. In this paper we obtain exact formulas for Greeks of European options based on the Lewis formula for the option value. Therefore, it is possible to obtain accurate approximations using Fast Fourier Transform. We will present an exhaustive development of Greeks for Call options. The error is shown for all Greeks in the Black-Scholes model, where Greeks can be exactly computed. Other models used in the literature are compared, such as the Merton and Variance Gamma models. The presented formulas can reach desired accuracy because our approach generates error only by approximation of the integral.

Suggested Citation

  • Federico De Olivera & Ernesto Mordecki, 2014. "Computing Greeks for L\'evy Models: The Fourier Transform Approach," Papers 1407.1343, arXiv.org.
    • Handle: RePEc:arx:papers:1407.1343
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    References listed on IDEAS

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    7. Mitya Boyarchenko & Sergei Levendorskiĭ, 2009. "Prices And Sensitivities Of Barrier And First-Touch Digital Options In Lévy-Driven Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(08), pages 1125-1170.
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