11 Pages Posted: 21 Oct 2010 Last revised: 30 Oct 2010
Date Written: March 20, 2010
We present an effcient algorithm for interpolation and extrapolation of a discrete set of European option prices into a an arbitrage consistent full double continuum in expiry and strike of option prices. The method is based on an application of the fully implicit finite difference method and related to the local variance gamma model of Carr (2008). In a numerical example we show how the model can fitted to all quoted prices in the SX5E option market (12 expiries, each with roughtly 10 strikes) in 0.05 seconds of CPU time.
Keywords: Option pricing, implicit finite difference
JEL Classification: G12, G13
Suggested Citation: Suggested Citation