Abstract

http://ssrn.com/abstract=1941464
 


 



Fourier Transforms, Option Pricing and Controls


Mark S. Joshi


University of Melbourne - Centre for Actuarial Studies

Chao Yang


University of Melbourne - Centre for Actuarial Studies

October 9, 2011


Abstract:     
We incorporate a simple and effective control-variate into Fourier inversion formulas for vanilla option prices. The control-variate used in this paper is the Black-Scholes formula whose volatility parameter is determined in a generic non-arbitrary fashion. We analyze contour dependence both in terms of value and speed of convergence. We use Gaussian quadrature rules to invert Fourier integrals, and numerical results suggest that performing the contour integration along the real axis leads to the best pricing performance.

Number of Pages in PDF File: 20

Keywords: Fourier transform, control-variate, numerical integration

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Date posted: October 10, 2011  

Suggested Citation

Joshi, Mark S. and Yang, Chao, Fourier Transforms, Option Pricing and Controls (October 9, 2011). Available at SSRN: http://ssrn.com/abstract=1941464 or http://dx.doi.org/10.2139/ssrn.1941464

Contact Information

Mark Joshi (Contact Author)
University of Melbourne - Centre for Actuarial Studies ( email )
Melbourne, 3010
Australia
Chao Yang
University of Melbourne - Centre for Actuarial Studies ( email )
Melbourne, 3010
Australia
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