medium · FRM Part 1 Valuation and Risk Models
A risk practitioner is comparing Monte Carlo simulation to the Delta-Gamma approximation for a complex portfolio of path-dependent options.
What is a primary disadvantage of the Delta-Gamma approach in this scenario?
- It is unable to incorporate correlations between different underlying assets.
- It requires significantly more computational power than Monte Carlo due to the calculation of second-order derivatives.
- It assumes that all options in the portfolio have the same expiration date.
- It fails to capture path-dependent features and higher-order moments (like 'speed' or 'color') that Monte Carlo revaluation handles natively.
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