Next Article in Journal
China and Special Drawing Rights—Towards a Better International Monetary System
Next Article in Special Issue
The Impact of Algorithmic Trading in a Simulated Asset Market
Previous Article in Journal / Special Issue
Positive Liquidity Spillovers from Sovereign Bond-Backed Securities
Article Menu
Issue 2 (June) cover image

Export Article

Open AccessArticle

Efficient Numerical Pricing of American Call Options Using Symmetry Arguments

1
Department of Economics, University of Western Ontario, London, ON N6A 5C2, Canada
2
Department of Statistical and Actuarial Sciences, University of Western Ontario, London, ON N6A 5B7, Canada
J. Risk Financial Manag. 2019, 12(2), 59; https://doi.org/10.3390/jrfm12020059
Received: 12 March 2019 / Revised: 29 March 2019 / Accepted: 4 April 2019 / Published: 9 April 2019
(This article belongs to the Special Issue Computational Finance)
  |  
PDF [609 KB, uploaded 9 April 2019]
  |  

Abstract

This paper demonstrates that it is possible to improve significantly on the estimated call prices obtained with the regression and simulation-based least-squares Monte Carlo method by using put-call symmetry. The results show that, for a large sample of options with characteristics of relevance in real-life applications, the symmetric method performs much better on average than the regular pricing method, is the best method for most of the options, never performs poorly and, as a result, is extremely efficient compared to the optimal, but unfeasible method that picks the method with the smallest Root Mean Squared Error (RMSE). A simple classification method is proposed that, by optimally selecting among estimates from the symmetric method with a reasonably small order used in the polynomial approximation, achieves a relative efficiency of more than 98 % . The relative importance of using the symmetric method increases with option maturity and with asset volatility. Using the symmetric method to price, for example, real options, many of which are call options with long maturities on volatile assets, for example energy, could therefore improve the estimates significantly by decreasing their bias and RMSE by orders of magnitude. View Full-Text
Keywords: least-squares Monte Carlo; put-call symmetry; regression; simulation least-squares Monte Carlo; put-call symmetry; regression; simulation
Figures

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
SciFeed

Share & Cite This Article

MDPI and ACS Style

Stentoft, L. Efficient Numerical Pricing of American Call Options Using Symmetry Arguments. J. Risk Financial Manag. 2019, 12, 59.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics

1

Comments

[Return to top]
J. Risk Financial Manag. EISSN 1911-8074 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top