A simple recursive numerical method for Bermudan option pricing under Lévy processes

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Title: A simple recursive numerical method for Bermudan option pricing under Lévy processes
Authors: O'Sullivan, Conall
Permanent link: http://hdl.handle.net/10197/1174
Date: Aug-2006
Abstract: A numerical method is developed that can price options, including exotic options that can be priced recursively such as Bermudan options, when the underlying process is an exponential Lévy process with closed form conditional characteristic function. The numerical method is an extension of a recent quadrature option pricing method so that it can be applied with the use of fast Fourier transforms. Thus the method possesses desirable features of both transform and quadrature option pricing techniques since it can be applied for a very general set of underlying Lévy processes and can handle certain exotic features. To illustrate the method it is applied to European and Bermudan options for a log normal process, a jump diffusion process, a variance gamma process and a normal inverse Gaussian process.
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Series/Report no.: Centre for Financial Markets working paper series; WP-07-19
Subject LCSH: Options (Finance)--Mathematical models
Lévy processes
Other versions: http://www.ucd.ie/bankingfinance/docs/wp/WP-07-19.pdf
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Centre for Financial Markets Working Papers

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