NEARLY EXACT OPTION PRICE SIMULATION USING CHARACTERISTIC FUNCTIONS

Author:

BERNARD CAROLE1,CUI ZHENYU1,MCLEISH DON1

Affiliation:

1. 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.

Publisher

World Scientific Pub Co Pte Lt

Subject

General Economics, Econometrics and Finance,Finance

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