Option Pricing Using Fourier Transforms: A Numerically Efficient Simplification

Abstract

This paper presents a simple manipulation that (i) reduces the two numerical integrations needed to compute option prices using fourier inversion into a single numerical integration and (ii) reduces the number of characteristic function evaluations needed to obtain a given level of accuracy. The simplification does not preclude the use of other numerical techniques to increase computational speed. It will primarily help in empirical studies and in model calibration, since, these are occasions when computational efficiency is critical.

Keywords: Option valuation, numerical methods, fourier inversion

JEL Classification: G13