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rwang716
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Joined: July 18th, 2019, 6:18 am

### High Accuracy Greeks computation under trinomial model

I am currently working on the Tian4 trinomial model for vanilla American call/puts. The performance of price accuracy turns out to be quite good. However, I am wondering if there is any way to increase the computation accuracy of delta.
The traditional way of computing delta = (up price - down price)/(uS0 - dS0) performs quite poorly in terms of accuracy.
I believe there must be some ways of weighting up price and down price or middle price unevenly that can significantly increase the accuracy.
Also, since this way of computing delta happens at time dt, this method is inherently flawed. Is there any ways to avoid it or to offset the effects of dt.
Thanks a lot.

Cuchulainn
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### Re: High Accuracy Greeks computation under trinomial model

I doubt (very much) if the Trinomial method and divided differences will bring any joy. I don't want to delineate all the issues that must be addressed. In short, I think it is not very good. Certainly not under all parameter regimes.

Do people use this method in real life?

A better approach is to let FDM loose on the PDE.

Some other ways are described here.

BTW what is 'High Accuracy' in this case? Can you quantify is as a function of dx, dt?
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rwang716
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Posts: 12
Joined: July 18th, 2019, 6:18 am

### Re: High Accuracy Greeks computation under trinomial model

the reason why we choose to use tree models is that it is stable, accuracy controlable, intuitive and straightforward to calculate greeks.
Since we are doing option HFT, the speed is equally important as accuracy. I have tried many other approximation methods like BAW, JZ, Bjerksund etc. But all these methods exibits some erratic fashion in terms of accracy if we test them thoroughly. For example, the error of JZ greeks formula is so large near EEB that we cannot use them in practice.

bearish
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Joined: February 3rd, 2011, 2:19 pm

### Re: High Accuracy Greeks computation under trinomial model

For your purposes, this approach may offer a handful of orders of magnitude of improvement. But I'm not really an expert on this stuff any more... High Performance American Option Pricing

DavidJN
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### Re: High Accuracy Greeks computation under trinomial model

You can improve the accuracy of delta computations by implementing the "overshoot" technique, which removes the dt issue you described.  This technique is described in Hull's classic textbook.

Alan
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### Re: High Accuracy Greeks computation under trinomial model

If you set up the option value pde problem using x = log S with solution $f(x,t)$, you can differentiate it to get the pde for $g(x,t) = f_x$. Then perhaps simply solve that second pde for $g$ on a trinomial lattice, and convert to delta. You probably need two passes, the first to get the optimal exercise nodes from the option value solution. Might be a sufficient improvement.

But use bearish's link if you need major accuracy.

Cuchulainn
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### Re: High Accuracy Greeks computation under trinomial model

One way to compute delta is to use the SDE that it satisfies using the Kunita formula (from Farid) as discussed here.

https://forum.wilmott.com/viewtopic.php?f=8&t=101811&start=15

Not sure how that pans out for American options.
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik

Cuchulainn
Posts: 60841
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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### Re: High Accuracy Greeks computation under trinomial model

If you set up the option value pde problem using x = log S with solution $f(x,t)$, you can differentiate it to get the pde for $g(x,t) = f_x$. Then perhaps simply solve that second pde for $g$ on a trinomial lattice, and convert to delta. You probably need two passes, the first to get the optimal exercise nodes from the option value solution. Might be a sufficient improvement.

But use bearish's link if you need major accuracy.
This approach works but why not do the full FDM approach?
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik

Alan
Posts: 9929
Joined: December 19th, 2001, 4:01 am
Location: California
Contact:

### Re: High Accuracy Greeks computation under trinomial model

If you set up the option value pde problem using x = log S with solution $f(x,t)$, you can differentiate it to get the pde for $g(x,t) = f_x$. Then perhaps simply solve that second pde for $g$ on a trinomial lattice, and convert to delta. You probably need two passes, the first to get the optimal exercise nodes from the option value solution. Might be a sufficient improvement.

But use bearish's link if you need major accuracy.
This approach works but why not do the full FDM approach?

Just trying to answer the OP's query. A lot of people are comfortable with explicit binomial/trinomial lattice solns & less so with PDE numerics.

Cuchulainn
Posts: 60841
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
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### Re: High Accuracy Greeks computation under trinomial model

If you set up the option value pde problem using x = log S with solution $f(x,t)$, you can differentiate it to get the pde for $g(x,t) = f_x$. Then perhaps simply solve that second pde for $g$ on a trinomial lattice, and convert to delta. You probably need two passes, the first to get the optimal exercise nodes from the option value solution. Might be a sufficient improvement.

But use bearish's link if you need major accuracy.
This approach works but why not do the full FDM approach?

Just trying to answer the OP's query. A lot of people are comfortable with explicit binomial/trinomial lattice solns & less so with PDE numerics.
Fair enough. It would be nice to see how the PD E(or was it SDE??) for delta maps to the trinomial method.
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik

Cuchulainn
Posts: 60841
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### Re: High Accuracy Greeks computation under trinomial model

dbl
Last edited by Cuchulainn on July 27th, 2019, 11:05 am, edited 2 times in total.
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik

Cuchulainn
Posts: 60841
Joined: July 16th, 2004, 7:38 am
Location: Amsterdam
Contact:

### Re: High Accuracy Greeks computation under trinomial model

If you set up the option value pde problem using x = log S with solution $f(x,t)$, you can differentiate it to get the pde for $g(x,t) = f_x$. Then perhaps simply solve that second pde for $g$ on a trinomial lattice, and convert to delta. You probably need two passes, the first to get the optimal exercise nodes from the option value solution. Might be a sufficient improvement.

But use bearish's link if you need major accuracy.
This approach works but why not do the full FDM approach?

Just trying to answer the OP's query. A lot of people are comfortable with explicit binomial/trinomial lattice solns & less so with PDE numerics.
Fair enough. Under that constraint it would be interesting to map PDE/SDE for $g$ to trinomial.

I haven't seen anyone doing that before.
http://www.datasimfinancial.com
http://www.datasim.nl

Approach your problem from the right end and begin with the answers. Then one day, perhaps you will find the final question..
R. van Gulik

rwang716
Topic Author
Posts: 12
Joined: July 18th, 2019, 6:18 am

### Re: High Accuracy Greeks computation under trinomial model

Have increased the accuracy of deltas computation by roughly 20 times, using the non-cenctered difference methods. The accuracy problem is solved. Thanks, guys.

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