Two-dimensional Fourier cosine series expansion method for pricing financial options

Marjon Ruijter and Cornelis Oosterlee

No 225, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: In financial markets, traders deal in assets and options. There exist many types of options and the best-known are the European call and put option. These options give holders the right to buy or sell assets at a specific future time for a predetermined price. This paper examines options of which the payoff depends on two or more different assets. It may involve, for example, an average or the maximum of several asset prices. For pricing options, different types of numerical methods are available, such as Monte Carlo simulation techniques and partial differential equation methods. We apply a method based on Fourier cosine series expansions, called the COS method. We extend this method to higher dimensions with a multidimensional asset-price process and perform extensive numerical experiments.

JEL-codes: C02 C63 G12 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-cmp and nep-ore
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Citations: View citations in EconPapers (37)

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