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Numerical pricing of European options with arbitrary payoffs

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  • Ricardo Pachón

    (Credit Suisse, One Cabot Square, London, E14 4QJ, UK)

Abstract

In this paper we introduce the CHEB method, a quadrature-based methodology for the fast and accurate pricing of European options with arbitrary payoffs. The method comes as a natural application of Chebfun, a numerical computing software package built on the approximation properties of Chebyshev series and Chebyshev interpolants. For the methodology to be useful for practical purposes, we address two considerations: the recovery of the underlying’s density from the characteristic function, and the estimation of the truncation error. The methodology can be viewed as an extension of the COS method, a quadrature-based methodology designed for the pricing of standard, non-arbitrary payoffs.

Suggested Citation

  • Ricardo Pachón, 2018. "Numerical pricing of European options with arbitrary payoffs," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-31, June.
    • Handle: RePEc:wsi:ijfexx:v:05:y:2018:i:02:n:s2424786318500159
    DOI: 10.1142/S2424786318500159
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    References listed on IDEAS

    as
    1. Fang, Fang & Oosterlee, Kees, 2008. "A Novel Pricing Method For European Options Based On Fourier-Cosine Series Expansions," MPRA Paper 9319, University Library of Munich, Germany.
    2. Stefan Macovschi & François Quittard-Pinon, 2006. "On the Pricing of Power and Other Polynomial Options," Post-Print hal-02313166, HAL.
    Full references (including those not matched with items on IDEAS)

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