Numerical Recipes 3rd Edition: The Art of Scientific Computing
Numerical Recipes 3rd Edition: The Art of Scientific Computing
A Fast and Accurate FFT-Based Method for Pricing Early-Exercise Options under Lévy Processes
SIAM Journal on Scientific Computing
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Spread options are a fundamental class of derivative contracts written on multiple assets and are widely traded in a range of financial markets. There is a long history of approximation methods for computing such products, but as yet there is no preferred approach that is accurate, efficient, and flexible enough to apply in general asset models. The present paper introduces a new formula for general spread option pricing based on Fourier analysis of the payoff function. Our detailed investigation, including a flexible and general error analysis, proves the effectiveness of a fast Fourier transform implementation of this formula for the computation of spread option prices. It is found to be easy to implement, stable, efficient, and applicable in a wide variety of asset pricing models.