Efficient hedging in Bates model using high-order compact finite differences

TL;DR

This paper assesses a high-order compact finite difference scheme for option hedging in the Bates model, demonstrating its superior performance over standard methods across various examples.

Contribution

The paper introduces and evaluates a high-order compact finite difference scheme for option hedging in the Bates model, showing improved accuracy over standard methods.

Findings

The high-order scheme outperforms standard finite difference methods in hedging accuracy.

The scheme provides more precise option pricing in the Bates model.

Performance improvements are consistent across different test cases.

Abstract

We evaluate the hedging performance of a high-order compact finite difference scheme from [4] for option pricing in Bates model. We compare the scheme's hedging performance to standard finite difference methods in different examples. We observe that the new scheme outperforms a standard, second-order central finite difference approximation in all our experiments.