Fast Numerical Valuation of American, Exotic and Complex Options

28 Pages Posted: 28 Jul 1997

See all articles by M. A. H. Dempster

M. A. H. Dempster

University of Cambridge - Centre for Financial Research; Cambridge Systems Associates Limited; University of Cambridge - Judge Business School

J.P. Hutton

Nomura Holdings, Inc. (NHI)

Date Written: May 5, 1997

Abstract

The purpose of this paper is to present evidence in support of the hypothesis that fast, accurate and parametrically robust numerical valuation of a wide range of derivative securities can be achieved by use of direct numerical methods in the solution of the associated PDE problems. Specifically, linear programming methods for American vanilla and exotic options, and explicit methods for a three stochastic state variable problem (a multi-period terminable diff swap) are explored and promising numerical results are discussed. The resulting value surface gives, simultaneously, valuation for many maturities and underlying prices, and the parameters required for risk analysis.

JEL Classification: G13

Suggested Citation

Dempster, M. A. H. and Hutton, J.P., Fast Numerical Valuation of American, Exotic and Complex Options (May 5, 1997). Available at SSRN: https://ssrn.com/abstract=39780 or http://dx.doi.org/10.2139/ssrn.39780

M. A. H. Dempster (Contact Author)

University of Cambridge - Centre for Financial Research ( email )

Centre for Mathematical Sciences
Wilberforce Road
Cambridge, CB3 0WA
United Kingdom

Cambridge Systems Associates Limited ( email )

5-7 Portugal Place
Cambridge, CB5 8AF
United Kingdom

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

J.P. Hutton (Contact Author)

Nomura Holdings, Inc. (NHI)

1 St. Martins-le-Grand
Nomura Research Inst Nomura House
London EC1A 4NP
United Kingdom
0171 521 2000 (Phone)

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