An Analytic COS Method for Compound Option Valuation

Zhipeng Huang and Cornelis W. Oosterlee

Papers from arXiv.org

Abstract: We develop an analytic Fourier cosine (COS) method for the valuation of compound options. By deriving closed-form expressions for the cosine coefficients at all compound stages, the proposed method eliminates the need for numerical quadrature in intermediate exercise stages while retaining the convergence properties of the underlying COS approximation. The formulation extends to multi-stage compound structures and a broader class of payoffs, and remains applicable to a wide class of stochastic models characterized by known characteristic functions, including jump-diffusion dynamics. Numerical experiments demonstrate improved computational efficiency compared with quadrature-based implementations while maintaining high accuracy. Applications to staged real-option problems further illustrate the flexibility of the method in handling nested decision structures under different uncertainty dynamics.

Date: 2026-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://arxiv.org/pdf/2607.25599 Latest version (application/pdf)

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:arx:papers:2607.25599

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().