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Optimal Fourier Inversion in Semi-Analytical Option Pricing

Roger Lord
Cardano, United Kingdom

Christian Kahl
University of Wuppertal; ABN-Amro Bank, United Kingdom


May 10, 2007

Tinbergen Institute Discussion Paper No. 2006-066/2

Abstract:     
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.

Keywords: Option pricing, Fourier inversion, Carr-Madan, Heston, stochastic volatility, characteristic function, damping, saddlepoint approximations

JEL Classifications: C63, G13

Working Paper Series

Date posted: August 03, 2006 ; Last revised: June 03, 2007

Suggested Citation

Lord, Roger and Kahl, Christian, Optimal Fourier Inversion in Semi-Analytical Option Pricing (May 10, 2007). Tinbergen Institute Discussion Paper No. 2006-066/2. Available at SSRN: http://ssrn.com/abstract=921336


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Contact Information

Roger Lord (Contact Author)
Cardano, United Kingdom ( email )
St Clements House
5th Floor
London EC4N 7AE
United Kingdom
HOME PAGE: http://www.cardano.com
Christian Kahl
University of Wuppertal ( email )
Gaußstraße 20
42097 Wuppertal Germany
ABN-Amro Bank, United Kingdom ( email )
London EC2N 4BN United Kingdom
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