Hedging and pricing early-exercise options with complex fourier series expansion

Article


Chan, R. 2019. Hedging and pricing early-exercise options with complex fourier series expansion. The North American Journal of Economics and Finance.
AuthorsChan, R.
Abstract

We introduce a new numerical method called the complex Fourier series (CFS) method proposed by Chan (2017) to price options with an early-exercise feature—American, Bermudan and discretely monitored barrier options—under exponential Lévy asset dynamics. This new method allows us to quickly and accurately compute the values of early-exercise options and their Greeks. We also provide an error analysis to demonstrate that, in many cases, we can achieve an exponential convergence rate in the pricing method as long as we choose the correct truncated computational interval. Our numerical analysis indicates that the CFS method is computationally more comparable or favourable than the methods currently available. Finally, the superiority of the CFS method is illustrated with real financial data by considering Standard & Poor’s depositary receipts (SPDR) exchange-traded fund (ETF) on the S&P 500® index options, which are American options traded from November 2017 to February 2018 and from 30 January 2019 to 21 June 2019.

JournalThe North American Journal of Economics and Finance
ISSN1062-9408
Year2019
PublisherElsevier
Accepted author manuscript
License
Digital Object Identifier (DOI)doi:10.1016/j.najef.2019.04.016
Web address (URL)https://doi.org/10.1016/j.najef.2019.04.016
Publication dates
Online22 Apr 2019
Publication process dates
Deposited22 May 2019
Accepted26 Apr 2019
Accepted26 Apr 2019
Copyright information© 2019 Elsevier.
Page rangeIn Press
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https://repository.uel.ac.uk/item/843x5

Accepted author manuscript

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