A simple recursive numerical method for Bermudan option pricing under Lévy processes

Conall O'Sullivan

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: A numerical method is developed that can price options, including exotic options that can be priced recursively such as Bermudan options, when the underlying process is an exponential Lévy process with closed form conditional characteristic function. The numerical method is an extension of a recent quadrature option pricing method so that it can be applied with the use of fast Fourier transforms. Thus the method possesses desirable features of both transform and quadrature option pricing techniques since it can be applied for a very general set of underlying Lévy processes and can handle certain exotic features. To illustrate the method it is applied to European and Bermudan options for a log normal process, a jump diffusion process, a variance gamma process and a normal inverse Gaussian process.

Keywords: Options (Finance)--Mathematical models; Lévy processes (search for similar items in EconPapers)
Date: 2006-08
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http://hdl.handle.net/10197/1174 First version, 2006 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1174

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