European Option General First Order Error Formula

We study the value of European security derivatives in the Black-Scholes model when the underlying asset ξ is approximated by random walks ξ⁽ⁿ⁾. We obtain an explicit error formula, up to a term of order O(n^{-(3/2)}), which is valid for general approximating schemes and general payoff functions. We show how this error formula can be used to find random walks ξ⁽ⁿ⁾ for which option values converge at a speed of O(n^{-(3/2)}).

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Year of publication:	2012-05-10
Authors:	Leduc, Guillaume
Institutions:	Volkswirtschaftliche Fakultät, Ludwig-Maximilians-Universität München
Subject:	European options \| approximation scheme \| error formula \| Black-Scholes

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Extent:	application/pdf
Series:	MPRA Paper.
Type of publication:	Book / Working Paper
Classification:	G13 - Contingent Pricing; Futures Pricing
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10011260066