Affiliations: Quantitative Strategies, Investment Banking Division, Credit Suisse Group, One Cabot Square, London E14 4QJ, United Kingdom
Correspondence:
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Corresponding author: Luca Capriotti, Quantitative Strategies, Investment Banking Division, Credit Suisse Group, One Cabot Square, London E14 4QJ, United Kingdom. E-mail: luca.capriotti@gmail.com
Abstract: We show how Adjoint Algorithmic Differentiation can be combined with the so-called Pathwise Derivative and Likelihood Ratio Method to construct efficient Monte Carlo estimators of second order price sensitivities of derivative portfolios. We demonstrate with a numerical example how the proposed technique can be straightforwardly implemented to greatly reduce the computation time of second order risk.
Keywords: Adjoint Algorithmic Differentiation, Monte Carlo, derivatives securities, risk management