Failure of Fourier pricing techniques to approximate the Greeks

Abstract

The Greeks Delta and Gamma of plain vanilla options play a fundamental role in finance, e.g., in hedging or risk management. These Greeks are approximated in many models such as the widely used Variance Gamma model by Fourier techniques such as the Carr-Madan formula, the COS method or the Lewis formula. However, for some realistic market parameters, we show empirically that these three Fourier methods completely fail to approximate the Greeks. As an application we show that the Delta-Gamma VaR is severely underestimated in realistic market environments. As a solution, we propose to use finite differences instead to obtain the Greeks.