NAG C Library Function Document

nag_lookback_fls_greeks (Nag_OrderType order, Nag_CallPut option, Integer m, Integer n, const double sm[], double s, const double t[], double sigma, double r, double q, double p[], double delta[], double gamma[], double vega[], double theta[], double rho[], double crho[], double vanna[], double charm[], double speed[], double colour[], double zomma[], double vomma[], NagError *fail)

3

Description

nag_lookback_fls_greeks (s30bbc) computes the price of a floating-strike lookback call or put option, together with the Greeks or sensitivities, which are the partial derivatives of the option price with respect to certain of the other input parameters. A call option of this type confers the right to buy the underlying asset at the lowest price,

S_{\min}

, observed during the lifetime of the contract. A put option gives the holder the right to sell the underlying asset at the maximum price,

S_{\max}

, observed during the lifetime of the contract. Thus, at expiry, the payoff for a call option is

S - S_{\min}

, and for a put,

S_{\max} - S

For a given minimum value the price of a floating-strike lookback call with underlying asset price,

S

, and time to expiry,

T

, is

P_{call} = S e^{- q T} Φ (a_{1}) - S_{\min} e^{- r T} Φ (a_{2}) + S e^{- r T} \frac{σ^{2}}{2 b} [{(\frac{S}{S_{\min}})}^{- 2 b / σ^{2}} Φ ({- a}_{1} + \frac{2 b}{σ} \sqrt{T}) {- e}^{b T} Φ ({- a}_{1})],

where

b = r - q \neq 0

. The volatility,

σ

, risk-free interest rate,

r

, and annualised dividend yield,

q

, are constants.

The corresponding put price is

P_{put} = S_{\max} e^{- r T} Φ ({- a}_{2}) - S e^{- q T} Φ ({- a}_{1}) + S e^{- r T} \frac{σ^{2}}{2 b} [- {(\frac{S}{S_{\max}})}^{- 2 b / σ^{2}} Φ (a_{1} - \frac{2 b}{σ} \sqrt{T}) + e^{b T} Φ (a_{1})] .

In the above,

Φ

denotes the cumulative Normal distribution function,

Φ (x) = \int_{- \infty}^{x} ϕ (y) d y

where

ϕ

denotes the standard Normal probability density function

ϕ (y) = \frac{1}{\sqrt{2 π}} \exp (- y^{2} / 2)

and

\begin{array}{l} a_{1} = \frac{\ln (S / S_{m}) + (b + σ^{2} / 2) T}{σ \sqrt{T}} \\ a_{2} = a_{1} - σ \sqrt{T} \end{array}

where

S_{m}

is taken to be the minimum price attained by the underlying asset,

S_{\min}

, for a call and the maximum price,

S_{\max}

, for a put.

The option price

P_{i j} = P (X = X_{i}, T = T_{j})

is computed for each minimum or maximum observed price in a set

S_{\min} (i)

S_{\max} (i)

i = 1, 2, \dots, m

, and for each expiry time in a set

T_{j}

j = 1, 2, \dots, n

4

References

Goldman B M, Sosin H B and Gatto M A (1979) Path dependent options: buy at the low, sell at the high Journal of Finance 34 1111–1127

5

Arguments

1: $order$ – Nag_OrderTypeInput

On entry: the order argument specifies the two-dimensional storage scheme being used, i.e., row-major ordering or column-major ordering. C language defined storage is specified by

order = Nag_RowMajor

. See Section 3.3.1.3 in How to Use the NAG Library and its Documentation for a more detailed explanation of the use of this argument.

Constraint:

order = Nag_RowMajor

Nag_ColMajor

2: $option$ – Nag_CallPutInput

On entry: determines whether the option is a call or a put.

$option = Nag_Call$: A call; the holder has a right to buy.
$option = Nag_Put$: A put; the holder has a right to sell.

Constraint:

option = Nag_Call

Nag_Put

3: $m$ – IntegerInput

On entry: the number of minimum or maximum prices to be used.

Constraint:

m \geq 1

4: $n$ – IntegerInput

On entry: the number of times to expiry to be used.

Constraint:

n \geq 1

5: $sm [m]$ – const doubleInput

On entry:

sm [i - 1]

must contain

S_{\min} (i)

, the

i

th minimum observed price of the underlying asset when

option = Nag_Call

, or

S_{\max} (i)

, the maximum observed price when

option = Nag_Put

, for

i = 1, 2, \dots, m

Constraints:

$sm [i - 1] \geq z and sm [i - 1] \leq 1 / z$ , where $z = nag_real_safe_small_number$ , the safe range parameter, for $i = 1, 2, \dots, m$ ;
if $option = Nag_Call$ , $sm [i - 1] \leq S$ , for $i = 1, 2, \dots, m$ ;
if $option = Nag_Put$ , $sm [i - 1] \geq S$ , for $i = 1, 2, \dots, m$ .

6: $s$ – doubleInput

On entry:

S

, the price of the underlying asset.

Constraint:

s \geq z ​ and ​ s \leq 1.0 / z

, where

z = nag_real_safe_small_number

, the safe range parameter.

7: $t [n]$ – const doubleInput

On entry:

t [i - 1]

must contain

T_{i}

, the

i

th time, in years, to expiry, for

i = 1, 2, \dots, n

Constraint:

t [i - 1] \geq z

, where

z = nag_real_safe_small_number

, the safe range parameter, for

i = 1, 2, \dots, n

8: $sigma$ – doubleInput

On entry:

σ

, the volatility of the underlying asset. Note that a rate of 15% should be entered as

0.15

Constraint:

sigma > 0.0

9: $r$ – doubleInput

On entry: the annual risk-free interest rate,

r

, continuously compounded. Note that a rate of 5% should be entered as

0.05

Constraint:

r \geq 0.0

and

abs (r - q) > 10 \times eps \times \max (abs (r), 1)

, where

eps = nag_machine_precision

, the machine precision.

10: $q$ – doubleInput

On entry: the annual continuous yield rate. Note that a rate of 8% should be entered as

0.08

Constraint:

q \geq 0.0

and

abs (r - q) > 10 \times eps \times \max (abs (r), 1)

, where

eps = nag_machine_precision

, the machine precision.

11: $p [m \times n]$ – doubleOutput

Note: where

P (i, j)

appears in this document, it refers to the array element

$p [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$p [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

P (i, j)

contains

P_{i j}

, the option price evaluated for the minimum or maximum observed price

S_{\min} (i)

S_{\max} (i)

at expiry

t_{j}

for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

12: $delta [m \times n]$ – doubleOutput

Note: the

(i, j)

th element of the matrix is stored in

$delta [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$delta [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit: the

m \times n

array delta contains the sensitivity,

\frac{\partial P}{\partial S}

, of the option price to change in the price of the underlying asset.

13: $gamma [m \times n]$ – doubleOutput

Note: the

(i, j)

th element of the matrix is stored in

$gamma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$gamma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit: the

m \times n

array gamma contains the sensitivity,

\frac{\partial^{2} P}{\partial S^{2}}

, of delta to change in the price of the underlying asset.

14: $vega [m \times n]$ – doubleOutput

Note: where

VEGA (i, j)

appears in this document, it refers to the array element

$vega [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vega [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VEGA (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in the volatility of the underlying asset, i.e.,

\frac{\partial P_{i j}}{\partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

15: $theta [m \times n]$ – doubleOutput

Note: where

THETA (i, j)

appears in this document, it refers to the array element

$theta [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$theta [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

THETA (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in time, i.e.,

- \frac{\partial P_{i j}}{\partial T}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

, where

b = r - q

16: $rho [m \times n]$ – doubleOutput

Note: where

RHO (i, j)

appears in this document, it refers to the array element

$rho [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$rho [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

RHO (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in the annual risk-free interest rate, i.e.,

- \frac{\partial P_{i j}}{\partial r}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

17: $crho [m \times n]$ – doubleOutput

Note: where

CRHO (i, j)

appears in this document, it refers to the array element

$crho [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$crho [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

CRHO (i, j)

, contains the first-order Greek measuring the sensitivity of the option price

P_{i j}

to change in the annual cost of carry rate, i.e.,

- \frac{\partial P_{i j}}{\partial b}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

, where

b = r - q

18: $vanna [m \times n]$ – doubleOutput

Note: where

VANNA (i, j)

appears in this document, it refers to the array element

$vanna [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vanna [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VANNA (i, j)

, contains the second-order Greek measuring the sensitivity of the first-order Greek

Δ_{i j}

to change in the volatility of the asset price, i.e.,

- \frac{\partial Δ_{i j}}{\partial T} = - \frac{\partial^{2} P_{i j}}{\partial S \partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

19: $charm [m \times n]$ – doubleOutput

Note: where

CHARM (i, j)

appears in this document, it refers to the array element

$charm [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$charm [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

CHARM (i, j)

, contains the second-order Greek measuring the sensitivity of the first-order Greek

Δ_{i j}

to change in the time, i.e.,

- \frac{\partial Δ_{i j}}{\partial T} = - \frac{\partial^{2} P_{i j}}{\partial S \partial T}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

20: $speed [m \times n]$ – doubleOutput

Note: where

SPEED (i, j)

appears in this document, it refers to the array element

$speed [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$speed [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

SPEED (i, j)

, contains the third-order Greek measuring the sensitivity of the second-order Greek

Γ_{i j}

to change in the price of the underlying asset, i.e.,

- \frac{\partial Γ_{i j}}{\partial S} = - \frac{\partial^{3} P_{i j}}{\partial S^{3}}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

21: $colour [m \times n]$ – doubleOutput

Note: where

COLOUR (i, j)

appears in this document, it refers to the array element

$colour [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$colour [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

COLOUR (i, j)

, contains the third-order Greek measuring the sensitivity of the second-order Greek

Γ_{i j}

to change in the time, i.e.,

- \frac{\partial Γ_{i j}}{\partial T} = - \frac{\partial^{3} P_{i j}}{\partial S \partial T}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

22: $zomma [m \times n]$ – doubleOutput

Note: where

ZOMMA (i, j)

appears in this document, it refers to the array element

$zomma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$zomma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

ZOMMA (i, j)

, contains the third-order Greek measuring the sensitivity of the second-order Greek

Γ_{i j}

to change in the volatility of the underlying asset, i.e.,

- \frac{\partial Γ_{i j}}{\partial σ} = - \frac{\partial^{3} P_{i j}}{\partial S^{2} \partial σ}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

23: $vomma [m \times n]$ – doubleOutput

Note: where

VOMMA (i, j)

appears in this document, it refers to the array element

$vomma [(j - 1) \times m + i - 1]$ when $order = Nag_ColMajor$ ;
$vomma [(i - 1) \times n + j - 1]$ when $order = Nag_RowMajor$ .

On exit:

VOMMA (i, j)

, contains the second-order Greek measuring the sensitivity of the first-order Greek

Δ_{i j}

to change in the volatility of the underlying asset, i.e.,

- \frac{\partial Δ_{i j}}{\partial σ} = - \frac{\partial^{2} P_{i j}}{\partial σ^{2}}

, for

i = 1, 2, \dots, m

and

j = 1, 2, \dots, n

24: $fail$ – NagError *Input/Output

The NAG error argument (see Section 3.7 in How to Use the NAG Library and its Documentation).

6

Error Indicators and Warnings

NE_ALLOC_FAIL: Dynamic memory allocation failed.
See Section 2.3.1.2 in How to Use the NAG Library and its Documentation for further information.
NE_BAD_PARAM: On entry, argument $〈value〉$ had an illegal value.
NE_INT: On entry, $m = 〈value〉$ .
Constraint: $m \geq 1$ .

On entry, $n = 〈value〉$ .
Constraint: $n \geq 1$ .
NE_INTERNAL_ERROR: An internal error has occurred in this function. Check the function call and any array sizes. If the call is correct then please contact NAG for assistance.
See Section 2.7.6 in How to Use the NAG Library and its Documentation for further information.
NE_NO_LICENCE: Your licence key may have expired or may not have been installed correctly.
See Section 2.7.5 in How to Use the NAG Library and its Documentation for further information.
NE_REAL: On entry, $q = 〈value〉$ .
Constraint: $q \geq 0.0$ .

On entry, $r = 〈value〉$ .
Constraint: $r \geq 0.0$ .

On entry, $s = 〈value〉$ .
Constraint: $s \geq 〈value〉$ and $s \leq 〈value〉$ .

On entry, $sigma = 〈value〉$ .
Constraint: $sigma > 0.0$ .
NE_REAL_2: On entry, $r = 〈value〉$ and $q = 〈value〉$ .
Constraint: $|r - q| > 10 \times eps \times \max (|r|, 1)$ , where $eps$ is the machine precision.
NE_REAL_ARRAY: On entry, $sm [〈value〉] = 〈value〉$ .
Constraint: $〈value〉 \leq sm [i] \leq 〈value〉$ for all $i$ .

On entry, $t [〈value〉] = 〈value〉$ .
Constraint: $t [i] \geq 〈value〉$ for all $i$ .

On entry with a call option, $sm [〈value〉] = 〈value〉$ .
Constraint: for call options, $sm [i] \leq 〈value〉$ for all $i$ .

On entry with a put option, $sm [〈value〉] = 〈value〉$ .
Constraint: for put options, $sm [i] \geq 〈value〉$ for all $i$ .

7

Accuracy

The accuracy of the output is dependent on the accuracy of the cumulative Normal distribution function,

Φ

. This is evaluated using a rational Chebyshev expansion, chosen so that the maximum relative error in the expansion is of the order of the machine precision (see nag_cumul_normal (s15abc) and nag_erfc (s15adc)). An accuracy close to machine precision can generally be expected.

8

Parallelism and Performance

nag_lookback_fls_greeks (s30bbc) is threaded by NAG for parallel execution in multithreaded implementations of the NAG Library.

Please consult the x06 Chapter Introduction for information on how to control and interrogate the OpenMP environment used within this function. Please also consult the Users' Note for your implementation for any additional implementation-specific information.

9

Further Comments

None.

10

Example

This example computes the price of a floating-strike lookback put with a time to expiry of

6

months and a stock price of

87

. The maximum price observed so far is

100

. The risk-free interest rate is

6 %

per year and the volatility is

30 %

per year with an annual dividend return of

4 %

NAG C Library Function Document

nag_lookback_fls_greeks (s30bbc)

▸▿ Contents

1 Purpose

2 Specification

3 Description

4 References

5 Arguments

6 Error Indicators and Warnings

7 Accuracy

8 Parallelism and Performance

9 Further Comments

10 Example

10.1 Program Text

10.2 Program Data

10.3 Program Results

1

Purpose

2

Specification

3

Description

4

References

5

Arguments

6

Error Indicators and Warnings

7

Accuracy

8

Parallelism and Performance

9

Further Comments

10

Example

10.1

Program Text

10.2

Program Data

10.3

Program Results