Refined and Enhanced Fast Fourier Transform Techniques, with an Application to the Pricing of Barrier Options
33 Pages Posted: 24 May 2008 Last revised: 11 Jun 2008
Date Written: June 9, 2008
The fast Fourier transform (FFT) technique is now a standard tool for the numerical calculation of prices of derivative securities. Unfortunately, in many important situations, such as the pricing of contingent claims of European type near expiry, and the pricing of barrier options close to the barrier, the standard implementation of this technique leads to serious systematic errors. We propose a new, fast and efficient, variant of the FFT technique, which is free of these problems, and is as easy to implement as the most common version of FFT. As an example, we show how our method leads to a pricing algorithm for down-and-out barrier put options that is the most efficient one to date, both in terms of the speed and in terms of the accuracy of the computations.
Keywords: Option pricing, Fourier transform, FFT, Levy processes, Carr's randomization, barrier options, Wiener-Hopf factorization
JEL Classification: C63, G13
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
A Jump Diffusion Model for Option Pricing
By Steven Kou
Option Pricing Under a Double Exponential Jump Diffusion Model
By Steven Kou and Hui Wang
A Simple Option Formula for General Jump-Diffusion and Other Exponential Levy Processes