A Fourier-Based Valuation Method for Bermudan and Barrier Options under Heston's Model

Authors:
Fang Fang;Cornelis W. Oosterlee
Affiliations:
f.fang@ewi.tudelft.nl;c.w.oosterlee@cwi.nl
Venue:
SIAM Journal on Financial Mathematics
Year:
2011

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Abstract

We develop an efficient Fourier-based numerical method for pricing Bermudan and discretely monitored barrier options under the Heston stochastic volatility model. The two-dimensional pricing problem is dealt with by a combination of a Fourier cosine series expansion, as in [F. Fang and C. W. Oosterlee, SIAM J. Sci. Comput., 31 (2008), pp. 826-848, F. Fang and C. W. Oosterlee, Numer. Math., 114 (2009), pp. 27-62], and high-order quadrature rules in the other dimension. Error analysis and experiments confirm a fast error convergence.