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Pricing exotic derivatives exploiting structure

Author

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  • Sesana, Debora
  • Marazzina, Daniele
  • Fusai, Gianluca

Abstract

In this paper we introduce a new fast and accurate numerical method for pricing exotic derivatives when discrete monitoring occurs, and the underlying evolves according to a Markov one-dimensional stochastic processes. The approach exploits the structure of the matrix arising from the numerical quadrature of the pricing backward formulas to devise a convenient factorization that helps greatly in the speed-up of the recursion. The algorithm is general and is examined in detail with reference to the CEV (Constant Elasticity of Variance) process for pricing different exotic derivatives, such as Asian, barrier, Bermudan, lookback and step options for which up to date no efficient procedures are available. Extensive numerical experiments confirm the theoretical results. The MATLAB code used to perform the computation is available online at http://www1.mate.polimi.it/∼marazzina/BP.htm.

Suggested Citation

  • Sesana, Debora & Marazzina, Daniele & Fusai, Gianluca, 2014. "Pricing exotic derivatives exploiting structure," European Journal of Operational Research, Elsevier, vol. 236(1), pages 369-381.
  • Handle: RePEc:eee:ejores:v:236:y:2014:i:1:p:369-381
    DOI: 10.1016/j.ejor.2013.12.009
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Oleg L. Kritski & Vladimir F. Zalmezh, 2017. "Asymptotics for Greeks under the constant elasticity of variance model," Papers 1707.04149, arXiv.org, revised Jul 2017.
    2. repec:eee:ejores:v:266:y:2018:i:3:p:1134-1139 is not listed on IDEAS
    3. Fusai, Gianluca & Germano, Guido & Marazzina, Daniele, 2016. "Spitzer identity, Wiener-Hopf factorization and pricing of discretely monitored exotic options," European Journal of Operational Research, Elsevier, vol. 251(1), pages 124-134.
    4. Fusai, Gianluca & Germano, Guido & Marazzina, Daniele, 2016. "Spitzer identity, Wiener-Hopf factorization and pricing of discretely monitored exotic options," LSE Research Online Documents on Economics 67564, London School of Economics and Political Science, LSE Library.
    5. repec:eee:ejores:v:265:y:2018:i:2:p:559-570 is not listed on IDEAS
    6. repec:eee:apmaco:v:252:y:2015:i:c:p:418-437 is not listed on IDEAS

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