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Two-dimensional Fourier cosine series expansion method for pricing financial options

Author

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  • Marjon Ruijter
  • Kees Oosterlee

    (CWI)

Abstract

In financial markets, traders deal in assets and options. There exist many types of options and the best-known are the European call and put option. These options give holders the right to buy or sell assets at a specific future time for a predetermined price. This paper examines options of which the payoff depends on two or more different assets. It may involve, for example, an average or the maximum of several asset prices. For pricing options, different types of numerical methods are available, such as Monte Carlo simulation techniques and partial differential equation methods. We apply a method based on Fourier cosine series expansions, called the COS method. We extend this method to higher dimensions with a multidimensional asset-price process and perform extensive numerical experiments.

Suggested Citation

  • 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.
    • Handle: RePEc:cpb:discus:225
    as

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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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