Danske Bank - Danske Markets
Brian Norsk Huge
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.
Number of Pages in PDF File: 11
Keywords: Option pricing, implicit finite difference
JEL Classification: G12, G13
Date posted: October 21, 2010 ; Last revised: October 30, 2010