fakesson

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Dec 23

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Monte Carlo might be ok to OTC derivatives, however for automatic market making of exchange traded option, which are mostly American, it would be too slow.

After a bit more googling, I found these more recent slides by Jesper Andersen, where he believes that the Leif et al method could be extended for local vol (see page 25): https://www.cqfinstitute.org/sites/default/files/4%20-%20Jes...

Comment · 2 years ago

I googled and found slides there Leif extends the method to discrete dividends: https://www.math.cmu.edu/CCF/CCFevents/shreve/abstracts/L.An...

( I'm a fixed income quant, so I didn't look for it until now.) For a more advance model than Black-Scholes, e.g. local vol I don't expect it can be extended, and one would then need use some PDE based method.

Comment · 2 years ago

"High Performance American Option Pricing" by Leif Andersen et al is many orders of magnitude faster than any finite difference method or other PDE / tree method. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2547027

Given the exercise boundary, the American Option Price can be written exactly as a one-dimensional integral. That is the key insight to this superior method.