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Z -Transform and preconditioning techniques for option pricing

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  • Gianluca Fusai
  • Daniele Marazzina
  • Marina Marena
  • Michael Ng

Abstract

In the present paper, we convert the usual n -step backward recursion that arises in option pricing into a set of independent integral equations by using a z -transform approach. In order to solve these equations, we consider different quadrature procedures that transform the integral equation into a linear system that we solve by iterative algorithms and we study the benefits of suitable preconditioning techniques. We show the relevance of our procedure in pricing options (such as plain vanilla, lookback, single and double barrier options) when the underlying evolves according to an exponential Lévy process.

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File URL: http://hdl.handle.net/10.1080/14697688.2010.538074
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 12 (2012)
Issue (Month): 9 (November)
Pages: 1381-1394

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Handle: RePEc:taf:quantf:v:12:y:2012:i:9:p:1381-1394

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