Fast approximations of bond option prices under CKLS models

D.Y. Tangman, N. Thakoor, K. Dookhitram and M. Bhuruth

Finance Research Letters, 2011, vol. 8, issue 4, 206-212

Abstract: A new computational method for approximating prices of zero-coupon bonds and bond option prices under general Chan–Karolyi–Longstaff–Schwartz models is proposed. The pricing partial differential equations are discretized using second-order finite difference approximations and an exponential time integration scheme combined with best rational approximations based on the Carathéodory–Fejér procedure is employed for solving the resulting semi-discrete equations. The algorithm has a linear computational complexity and provides accurate bond and European bond option prices. We give several numerical results which illustrate the computational efficiency of the algorithm and uniform second-order convergence rates for the computed bond and bond option prices.

Keywords: Interest rate models; Bond options; Finite differences; Exponential time integration (search for similar items in EconPapers)
JEL-codes: C02 C63 E43 G12 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:8:y:2011:i:4:p:206-212

DOI: 10.1016/j.frl.2011.03.002

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