After producing thousands of semirandom solutions to derivative valuation and hedging, this efficient computer algorithm can point market decision makers in the right direction, estimating exposure to risk and providing a degree of protection.
Now, thanks to new work by Professors Paul Glasserman (CBS) and Mike Giles (Oxford), these rapid calculations of hedge ratios can happen even faster. Their recent paper in Risk magazine describes how it can be done — through the application of adjoint methods more commonly found in engineering design and fluid dynamics.
The paper — “Smoking Adjoints: Fast Monte Carlo Greeks”(Click here to download the PDF) — won the two authors Risk magazine's 2007 Quant of the Year award.
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