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

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Type of publication:	Book / Working Paper
Language:	English
Notes:	Leduc, Guillaume (2012): European Option General First Order Error Formula.
Classification:	G13 - Contingent Pricing; Futures Pricing
Source:	BASE

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