Numerical pricing of European options with arbitrary payoffs

Ricardo Pachón ()
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Ricardo Pachón: Credit Suisse, One Cabot Square, London, E14 4QJ, UK

International Journal of Financial Engineering (IJFE), 2018, vol. 05, issue 02, 1-31

Abstract: In this paper we introduce the CHEB method, a quadrature-based methodology for the fast and accurate pricing of European options with arbitrary payoffs. The method comes as a natural application of Chebfun, a numerical computing software package built on the approximation properties of Chebyshev series and Chebyshev interpolants. For the methodology to be useful for practical purposes, we address two considerations: the recovery of the underlying’s density from the characteristic function, and the estimation of the truncation error. The methodology can be viewed as an extension of the COS method, a quadrature-based methodology designed for the pricing of standard, non-arbitrary payoffs.

Keywords: Option pricing; Chebyshev series; Chebyshev interpolation; Chebfun (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S2424786318500159

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