Optimal Fourier Inversion in Semi-Analytical Option Pricing
Cardano Risk Management
University of Wuppertal; ABN-Amro Bank, United Kingdom
May 10, 2007
Tinbergen Institute Discussion Paper No. 2006-066/2
Fourier inversion is the computational method of choice for a fast and accurate calculation of plain vanilla option prices in models with an analytically available characteristic function. Shifting the contour of integration along the complex plane allows for different representations of the inverse Fourier integral. In this article, we present the optimal contour of the Fourier integral, taking into account numerical issues such as cancellation and explosion of the characteristic function. This allows for robust and fast option pricing for virtually all levels of strikes and maturities.
Number of Pages in PDF File: 21
Keywords: Option pricing, Fourier inversion, Carr-Madan, Heston, stochastic volatility, characteristic function, damping, saddlepoint approximations
JEL Classification: C63, G13working papers series
Date posted: August 3, 2006
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