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Pricing Correlation Options: from the P. Carr And D. Madan Approach to the New Method Based on the Fourier Transform

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  • Orzechowski Arkadiusz

    (Warsaw School of Economics, Collegium of Socio-Economics, Department of Banking, ul. Wiśniowa 41, 02-520 Warszawa, Poland)

Abstract

Pricing of options plays an important role in the financial industry. Investors knowing how to price derivative contracts quickly and accurately can beat the market. On the other hand market participants constructing their investment strategies with the use of options based on techniques that do not assure the highest computational speed and efficiency are doomed to failure. The aim of the article is to extend the existing methodology of pricing correlation options based on the Fourier transform. The article starts with a presentation of Carr and Madan’s concept (Carr & Madan, 1999). Then other methods of pricing options with the use of the Fourier transform are summarized. Finally, a new approach to pricing derivative contracts is derived and then applied to the correlation options.

Suggested Citation

  • Orzechowski Arkadiusz, 2018. "Pricing Correlation Options: from the P. Carr And D. Madan Approach to the New Method Based on the Fourier Transform," Economics and Business Review, Sciendo, vol. 4(1), pages 16-28, April.
    • Handle: RePEc:vrs:ecobur:v:4:y:2018:i:1:p:16-28:n:2
    DOI: 10.18559/ebr.2018.1.2
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    References listed on IDEAS

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