Efficient pricing of commodity options with early-exercise under the Ornstein–Uhlenbeck process

Title

Efficient pricing of commodity options with early-exercise under the Ornstein–Uhlenbeck process

 Author

Zhang, B.
Grzelak, L.A.
Oosterlee, C.W.

Faculty

Electrical Engineering, Mathematics and Computer Science

 Date

2010-02-28

 Abstract

We analyze the efficiency properties of a numerical pricing method based on Fourier-cosine expansions for early-exercise options. We focus on variants of Schwartz’ model [20] based on a mean reverting Ornstein-Uhlenbeck process [23], which is commonly used for modeling commodity prices. This process however does not possess favorable properties for the option pricing method of interest. We therefore propose an approximation of its characteristic function, so that the Fast Fourier Transform can be applied for highest efficiency.

 To reference this document use:

http://resolver.tudelft.nl/uuid:5d02b210-857d-4bda-81e0-9fd59da55906

 Publisher

Delft University of Technology, Faculty of Electrical Engineering, Mathematics and Computer Science, Delft Institute of Applied Mathematics

 ISSN

1389-6520

 Source

Reports of the Department of Applied Mathematical Analysis, 11-02

 Part of collection

Institutional Repository

 Document type

report

 Rights

(c)2011 Zhang, B., Grzelak, L.A., Oosterlee, C.W.
Files
PDF 11-02_Bowen_Zang.pdf 355.43 KB
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