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Pseudospectral methods for pricing options


  • Sangwon Suh


Models with two or more risk sources have been widely applied in option pricing in order to capture volatility smiles and skews. However, the computational cost of implementing these models can be large—especially for American-style options. This paper illustrates how numerical techniques called 'pseudospectral' methods can be used to solve the partial differential and partial integro-differential equations that apply to these multifactor models. The method offers significant advantages over finite-difference and Monte Carlo simulation schemes in terms of accuracy and computational cost.

Suggested Citation

  • Sangwon Suh, 2009. "Pseudospectral methods for pricing options," Quantitative Finance, Taylor & Francis Journals, vol. 9(6), pages 705-715.
  • Handle: RePEc:taf:quantf:v:9:y:2009:i:6:p:705-715 DOI: 10.1080/14697680902785292

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    References listed on IDEAS

    1. Peter Friz & Jim Gatheral, 2005. "Valuation of volatility derivatives as an inverse problem," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 531-542.
    2. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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