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Accurate vega calculation for Bermudan swaptions. (English) Zbl 1420.91448
Ehrhardt, Matthias (ed.) et al., Novel methods in computational finance. Cham: Springer. Math. Ind. 25, 65-82 (2017).
Summary: Short rate models are widely used for pricing of Bermudan swaptions. In addition to prices, traders and risk managers need sensitivities for hedging and risk management. Vega is the sensitivity of the price with respect to changes in market volatilities (i.e. implied Black’76 or Bachelier volatilities). This sensitivity is of particular importance for Bermudan swaptions.
It is common practice to evaluate vega by shifting market data and re-evaluating model prices. Even though this procedure is often used, in practice it is inefficient here since the model calibration process flattens out the shift of single volatility surface grid points. Thus this procedure may underestimate sensitivities. In this chapter, we demonstrate how adjoint algorithmic differentiation can be used to calculate accurate and stable vegas without loss of performance.
For the entire collection see [Zbl 1390.91011].
MSC:
 91G20 Derivative securities (option pricing, hedging, etc.)
Keywords:
Bermudan swaptions; vega calculation
dcc; dco/c++
Full Text:
References:
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