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Pricing of the European Options by Spectral Theory

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  • Dell'Era Mario, M.D.

Abstract

We discuss the efficiency of the spectral method for computing the value of the European Call Options, which is based upon the Fourier series expansion. We propose a simple approach for computing accurate estimates. We consider the general case, in which the volatility is time dependent, but it is immediate extend our methodology at the case of constant volatility. The advantage to write the arbitrage price of the European Call Options as Fourier series, is matter of computation complexity. Infact, the methods used to evaluate options of this kind have a high value of computation complexity, furthermore, them have not the capacity to manage it. We can define, by an easy analytical relation, the computation complexity of the problem in the framework of general theory of the ”Function Analysis”, called The Spectral Theory.

Suggested Citation

  • Dell'Era Mario, M.D., 2008. "Pricing of the European Options by Spectral Theory," MPRA Paper 17429, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17429
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    References listed on IDEAS

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    More about this item

    Keywords

    Options Pricing; Computation Complexity.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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