Pricing Financial Derivatives by Gram-Charlier Expansions

Yin-Hei (Michael) Cheng and Tony Wirjanto ()
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Yin-Hei (Michael) Cheng: Department of Statistics & Actuarial Science, School of Accounting & Finance, University of Waterloo, Canada

Working Paper series from Rimini Centre for Economic Analysis

Abstract: In this paper we provide several applications of Gram-Charlier expansions in financial derivative pricing. We first give an exposition on how to calculate swaption prices under a two-factor Cox-Ingersoll-Ross (CIR2) model. Then we apply this method to an extended version of the model (CIR2++). We also develop a procedure to calculate European call options under Heston’s model of stochastic volatility by the Gram-Charlier Expansions.

Date: 2013-12
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