tests/testthat/test-BS_Malliavin_Asian_Greeks.R

In anselmhudde/greeks: Sensitivities of Prices of Financial Options and Implied Volatilities

test_that("BS_Malliavin_Asian_Greeks is correct", {

  definition_of_greeks <-
    data.frame(greek = "delta", start = "fair_value", param = "initial_price") %>%
    add_row(greek = "rho", start = "fair_value", param = "r") %>%
    add_row(greek = "vega", start = "fair_value", param = "volatility")

  # We check the Greeks by also computing the derivative with finite difference
  # and comparing the results

  # We start with checking delta

  number_of_runs <- 10

  error <- numeric(number_of_runs)

  set.seed(42)

  for(i in 1:number_of_runs) {

    # the parameters are chosen at random
    initial_price <- runif(1, 90, 110)
    exercise_price <- runif(1, 90, 110)
    r <- runif(1, -0.01, 0.1)
    time_to_maturity <- runif(1, 0.2, 2)
    dividend_yield <- runif(1, 0, 0.1)
    volatility <- runif(1, 0.01, 1)
    model <- "Black_Scholes"
    payoff <- rep(c("call", "put"), number_of_runs)[i]
    greek <- "delta"
    param <- "initial_price"
    start <- "fair_value"

    Vals <-
      Greeks(
        initial_price = initial_price,
        exercise_price = exercise_price,
        r = r,
        time_to_maturity = time_to_maturity,
        volatility = volatility,
        dividend_yield = dividend_yield,
        model = "Black_Scholes",
        option_type = "Asian",
        payoff = payoff,
        greek = greek
      )

    F <- function(epsilon) {
      assign(param,
             c(get(param) + 2*epsilon, get(param) + epsilon,
               get(param) - 2*epsilon, get(param) - epsilon))
      Greeks(
        initial_price = initial_price,
        exercise_price = exercise_price,
        r = r,
        time_to_maturity = time_to_maturity,
        volatility = volatility,
        dividend_yield = dividend_yield,
        model = "Black_Scholes",
        option_type = "Asian",
        payoff = payoff,
        greek = start
      )
    }

    epsilon <- initial_price * 0.1

    F_eps <- F(epsilon)

    # We compute the derivative by Richardsons' extrapolation

    Vals_fd <- (-F_eps[1] + 8*F_eps[2] - 8*F_eps[3] + F_eps[4]) / (12 * epsilon)

    error[i] <-
      min(abs(Vals - Vals_fd)/(abs(Vals + epsilon)),
          abs(Vals - Vals_fd))

  }

  expect(max(error) < 0.1, "BS_Malliavin_Asian_Greeks: Delta error too high")

  # Now, we check rho and vega

  number_of_runs <- 4

  set.seed(42)

  error <- numeric(number_of_runs)

  for(i in 1:number_of_runs) {

    # the parameters are chosen at random
    initial_price <- runif(1, 90, 110)
    exercise_price <- runif(1, 90, 110)
    r <- runif(1, 0.01, 0.1)
    time_to_maturity <- runif(1, 0.2, 2)
    dividend_yield <- 0
    volatility <- runif(1, 0.01, 1)
    model <- "Black_Scholes"
    payoff <- rep(c("call", "put"), number_of_runs)[i]
    greek <- c("rho", "rho", "vega", "vega")[i]
    param <-
      definition_of_greeks[definition_of_greeks$greek == greek, "param"] %>%
      as.character()
    start <-
      definition_of_greeks[definition_of_greeks$greek == greek, "start"] %>%
      as.character()

    Vals <-
      BS_Malliavin_Asian_Greeks(
        initial_price = initial_price,
        exercise_price = exercise_price,
        r = r,
        time_to_maturity = time_to_maturity,
        volatility = volatility,
        dividend_yield = dividend_yield,
        payoff = payoff,
        greek = greek,
        paths = 10000,
        steps = 12
      )

    F <- function(epsilon) {
      assign(param, get(param) + epsilon)
      BS_Malliavin_Asian_Greeks(
        initial_price = initial_price,
        exercise_price = exercise_price,
        r = r,
        time_to_maturity = time_to_maturity,
        volatility = volatility,
        dividend_yield = dividend_yield,
        payoff = payoff,
        greek = start,
        paths = 10000,
        steps = 12
      )
    }

    epsilon <- get(param) * 0.1

    Vals_fd <- (F(epsilon) - F(-epsilon)) / (2 * epsilon)

    error[i] <-
      min(abs(Vals - Vals_fd)/(abs(Vals + epsilon)),
          abs(Vals - Vals_fd))

  }

  expect(max(error) < 0.01,
         paste0("BS_Malliavin_Asian_Greeks: ", greek, " error too high"))

})