Wavelet Based PDE Valuation of Derivatives

Dempster, M. A. H.; Eswaran, A.

doi:10.1007/978-3-0348-8266-8_30

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Supershare Binary Call Options1

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2003

2009

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“…Parameters for the problem are taken from (Dempster et al, 2000) and are summarized in Table 5. Given the two discontinuities (at K and K + d), we expect this problem to be more difficult than a regular digital call option.…”

Section: Supershare Binary Call Optionsmentioning

confidence: 99%

Convergence remedies for non-smooth payoffs in option pricing

Pooley¹,

Vetzal²,

Forsyth³

2003

JCF

131

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Discontinuities in the payoff function (or its derivatives) can cause inaccuracies for numerical schemes when pricing financial contracts. In particular, large errors may occur in the estimation of the hedging parameters. Three methods of dealing with discontinuities are discussed in this paper: averaging the initial data, shifting the grid, and a projection method. By themselves, these techniques are not sufficient to restore expected behaviour. However, when combined with a special timestepping method, high accuracy is achieved. Examples are provided for one and two factor option pricing problems.

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Section: Supershare Binary Call Optionsmentioning

confidence: 99%

Convergence remedies for non-smooth payoffs in option pricing

Pooley¹,

Vetzal²,

Forsyth³

2003

JCF

131

View full text Add to dashboard Cite

show abstract

Pseudospectral methods for pricing options

Suh

2009

Quantitative Finance

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Models with two or more risk sources have been widely applied in option pricing in order to capture volatility smiles and skews. However, the computational cost of implementing these models can be large—especially for American-style options. This paper illustrates how numerical techniques called 'pseudospectral' methods can be used to solve the partial differential and partial integro-differential equations that apply to these multifactor models. The method offers significant advantages over finite-difference and Monte Carlo simulation schemes in terms of accuracy and computational cost.American options, Options pricing, Partial differential equations, Stochastic volatility,

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Wavelet Based PDE Valuation of Derivatives

Cited by 2 publications

References 9 publications

Convergence remedies for non-smooth payoffs in option pricing

Convergence remedies for non-smooth payoffs in option pricing

Pseudospectral methods for pricing options

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