Reply To: Price Approximation

Steve Parsons

Price approximation is a simple client side technique in APM to see the impact of a price change on either delta or MTM. The sensitivity is used to approximate the change in value i.e. MTM is sensitive to Delta and Delta is sensitive to Gamma. The basic formula is “new MTM = old MTM + Delta * (change in price from when delta was calculated)” or “new Delta = old Delta + Gamma * (change in price from when delta was calculated)”. The weakness of this approach (and why some people call it a random delta generator) is that this technique is only suitable for linear products. If you have high second order sensitivity, barrier options, cross gamma, etc then the approximation will become invalid.

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