Hedging and pricing early-exercise options with complex fourier series expansion

Chan, Tat Lung (Ron)

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: We introduce a new numerical method called the complex Fourier series (CFS) method proposed by Chan (2017) to price options with an early-exercise feature—American, Bermudan and discretely monitored barrier options—under exponential Lévy asset dynamics. This new method allows us to quickly and accurately compute the values of early-exercise options and their Greeks. We also provide an error analysis to demonstrate that, in many cases, we can achieve an exponential convergence rate in the pricing method as long as we choose the correct truncated computational interval. Our numerical analysis indicates that the CFS method is computationally more comparable or favourable than the methods currently available. Finally, the superiority of the CFS method is illustrated with real financial data by considering Standard & Poor’s depositary receipts (SPDR) exchange-traded fund (ETF) on the S&P 500® index options, which are American options traded from November 2017 to February 2018 and from 30 January 2019 to 21 June 2019.

Keywords: American option; Bermuda option; Barrier option; complex Fourier series; early-exercise options; Lévy processes (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940818304194
Full text for ScienceDirect subscribers only

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:eee:ecofin:v:54:y:2020:i:c:s1062940818304194

DOI: 10.1016/j.najef.2019.04.016

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().