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Nearly Exact Option Price Simulation Using Characteristic Functions

Author

Listed:
  • CAROLE BERNARD

    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

  • ZHENYU CUI

    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

  • DON MCLEISH

    (Department of Statistics and Actuarial Science, University of Waterloo, 200 University Av., W. Waterloo, Ontario, N2L 3G1, Canada)

Abstract

This paper presents a new approach to perform a nearly unbiased simulation using inversion of the characteristic function. As an application we are able to give unbiased estimates of the price of forward starting options in the Heston model and of continuously monitored Parisian options in the Black-Scholes framework. This method of simulation can be applied to problems for which the characteristic functions are easily evaluated but the corresponding probability density functions are complicated.

Suggested Citation

  • Carole Bernard & Zhenyu Cui & Don Mcleish, 2012. "Nearly Exact Option Price Simulation Using Characteristic Functions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 15(07), pages 1-29.
    • Handle: RePEc:wsi:ijtafx:v:15:y:2012:i:07:n:s0219024912500471
    DOI: 10.1142/S0219024912500471
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    References listed on IDEAS

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    1. Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, December.
    2. Marjon Ruijter & Kees Oosterlee, 2012. "Two-dimensional Fourier cosine series expansion method for pricing financial options," CPB Discussion Paper 225, CPB Netherlands Bureau for Economic Policy Analysis.
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    Cited by:

    1. Zhenyu Cui & J. Lars Kirkby & Guanghua Lian & Duy Nguyen, 2017. "Integral Representation Of Probability Density Of Stochastic Volatility Models And Timer Options," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-32, December.
    2. Rehez Ahlip & Laurence A. F. Park & Ante Prodan, 2017. "Pricing currency options in the Heston/CIR double exponential jump-diffusion model," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-30, March.
    3. Bernard, Carole & Czado, Claudia, 2015. "Conditional quantiles and tail dependence," Journal of Multivariate Analysis, Elsevier, vol. 138(C), pages 104-126.
    4. Luca De Gennaro Aquino & Carole Bernard, 2019. "Semi-analytical prices for lookback and barrier options under the Heston model," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(2), pages 715-741, December.

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