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Nearly Exact Option Price Simulation Using Characteristic Functions

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Author Info

  • CAROLE BERNARD

    ()
    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

  • ZHENYU CUI

    ()
    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

  • DON MCLEISH

    ()
    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

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    Abstract

    This paper presents a new approach to perform a nearly unbiased simulation using inversion of the characteristic function. As an application we are able to give unbiased estimates of the price of forward starting options in the Heston model and of continuously monitored Parisian options in the Black-Scholes framework. This method of simulation can be applied to problems for which the characteristic functions are easily evaluated but the corresponding probability density functions are complicated.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 15 (2012)
    Issue (Month): 07 ()
    Pages: 1250047-1-1250047-29

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    Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:07:p:1250047-1-1250047-29

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    Related research

    Keywords: Monte Carlo simulations; Fourier inversion; characteristic function; Parisian option; forward-start options; importance sampling; Heston stochastic volatility model;

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