Model Risk and Differential Geometry Applied to Sensitivity Analysis

Z. Krajčovičová, P. P. Pérez Velasco: The aim of this contribution is to emphasize the importance of differential geometry within the financial modeling and usage process. The paper aims specifically at encouraging the inclusion of differential geometry to improve on the usage of a given model, and to reduce the inherent model risk Krajčovičová et al. (2018, 2017). The authors exemplify these ideas by considering application to the P&L explanation of digital options with the Black–Scholes model and demonstrate the improvement by comparing results under Euclidean and non–Euclidean geometries.