METHOD OF PAIRED CONTOURS AND PRICING BARRIER OPTIONS AND CDSs OF LONG MATURITIES

Sergei Levendorskiĭ ()
Additional contact information
Sergei Levendorskiĭ: Department of Mathematics, University of Leicester, University Road, Leicester, LE1 7RH, United Kingdom

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 05, 1-58

Abstract: For prices of options with barrier and lookback features, defaultable bonds and credit default swaps (CDSs), and probability distribution functions in Lévy models, as well as for joint probability distributions of a Lévy process and its supremum or/and infimum, one can derive explicit analytical formulas in terms of inverse Laplace/Fourier transforms and the Wiener–Hopf factorization. Unless the characteristic exponent is rational, the main examples being Brownian motion, double exponential jump-diffusion and hyper-exponential jump-diffusion models, accurate numerical realization of these formulas is difficult or very time consuming, especially for options of very long and very short maturities. In this paper, a systematic approach to contour deformations in pricing formulas is developed, which greatly increases the accuracy and speed of calculations; the efficiency of the method is demonstrated with numerical examples. For options and CDSs of moderate and long maturities, much faster asymptotic formulas of comparable level of accuracy are developed.

Keywords: Lévy processes; Laplace inversion; Wiener–Hopf factorization; barrier options; lookback options; credit default swaps; joint distribution of a Lévy process and its extrema; Fourier transform; conformal deformations; Gaver–Wynn–Rho algorithm; Gaver–Stehfest method (search for similar items in EconPapers)
Date: 2014
References: View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024914500332
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:17:y:2014:i:05:n:s0219024914500332

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024914500332

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().