A SIMPLE AMERICAN OPTION PRICING METHOD USING THE FAST FOURIER TRANSFORM

Suneal K. Chaudhary ()
Additional contact information
Suneal K. Chaudhary: Mathematics Department, Monmouth University, West Long Branch, NJ 07764, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 07, 1191-1202

Abstract: This paper describes a fast, flexible numerical technique to price American options and generate their value surface through time. The method runs faster and more accurately than the standard CRR binomial method in practical cases and calculates options on a considerably broader family of new, useful underlying asset processes. The technique relies on the Fast Fourier Transform (FFT) to convolve a transition function for the underlying asset process. The method allows the underlying asset process to be quite general; the previously known standard geometric Brownian motion and the Variance Gamma process [8], and a novel, purely empirical transition function are compared by computing their respective American put value surface and the exercise boundaries.

Keywords: American option pricing; empirical transition kernel; numerical option pricing; Longstaff–Schwartz method; CRR method (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024907004603
Access to full text is restricted to subscribers

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:wsi:ijtafx:v:10:y:2007:i:07:n:s0219024907004603

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024907004603

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().