THE EVALUATION OF MULTIASSET EUROPEAN AND AMERICAN OPTIONS VIA FOURIER HERMITE SERIES EXPANSIONS

Carl Chiarella, Nadima El-Hassan and Adam Kucera
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Carl Chiarella, Nadima El-Hassan: University of Technology, Sydney
Adam Kucera: Institutional Banking,Commonwealth Trading Bank of Australia
Authors registered in the RePEc Author Service: Carl Chiarella () and Nadima El-Hassan ()

No 287, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: We formulate European and American versions of a number of two-factor multiasset options (such as exchange options, quanto options and basket options) in a path integral framework via use of the Chapman-Kolmogorov equation. We show how to evaluate such options using Fourier-Hermite expansions developed in earlier work of the authors [see Chiarella, El-Hassan and Kucera (1999)], focusing in particular on how to handle the different boundary conditions associated with the different pay-off structures. The numerical results are compared for accuracy and speed with those obtained from lattice methods.

Date: 2000-07-05

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