Fugit
In mathematical finance, the fugit is the optimal date to exercise an American or Bermudan option. It is useful to compute it for hedging purpose.
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Origin[edit]
First introduced by Mark Garman in an article "Semper tempus fugit" published in 1989 by Risk Publications.[1]
The Latin term "tempus fugit" means "time flies"[2] and Mark Garman suggested to use that word because "time flies especially when you're having fun managing your book of American options".
Concept[edit]
Fugit is designed to represent "the expected time to exercise of American options".[3]
To compute the fugit, a second quantity at each node of the binomial tree used to estimate American options.
Fugit is also referred as the "risk-neutral expected life of the option"[4]
Fugit is not always a unique value.
Practical use[edit]
One can represent flows of an American swaption like the flows of a swap starting at the fugit multiplied by delta then use these to compute sensitivities.
References[edit]
- ^ Mark Garman in an article "Semper tempus fugit" published in 1989 by Risk Publications, listed in book "From Black Scholes to Black Holes" pages 89-91
- ^ "Tempus it et tamquam mobilis aura volat". Audio Latin Proverbs. Retrieved 30 July 2012.
- ^ Mark Garman in an article "Semper tempus fugit" published in 1989 by Risk Publications, listed in book "From Black Scholes to Black Holes" pages 89-91
- ^ Mark Rubinstein in an article "Guiding force" published in 1989 by Risk Publications, listed in book "From Black Scholes to Black Holes" pages 39-47, Fugit calculation is detailed pages 43 and 44
