Fourier Cosine Expansion Approach

Carl Chiarella, Boda Kang and Gunter H. Meyer

Chapter 6 in The Numerical Solution of the American Option Pricing Problem:Finite Difference and Transform Approaches, 2014, pp 141-168 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The Fourier cosine expansion approach (COS) is developed by Fang and Oosterlee (2008) using the Cosine series expansions of the value function at the next time level and the density function. The resulting equation is called the COS formula, due to the use of Fourier cosine series expansions. Fourier series expansions and their convergence properties have been discussed in Fang and Oosterlee (2008), so we do not go into details here but refer the reader to this excellent paper.

Keywords: American Option; Early Exercise; Method of Lines; Finite Difference Approach; Integral Transform Approach; Numerical Methods (search for similar items in EconPapers)
Date: 2014
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