Pricing extendible options using the fast Fourier transform

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Abstract

This paper applies the fast Fourier transform (FFT) approach, within the Black-Scholes framework, to the valuation of options whose time to maturity can be extended to a future date (extendible options). We determine the valuation of the extendible options as sums of expectations of indicator functions, leading to a semianalytic expression for the value of the options over a range of strikes. Compared to Monte Carlo simulation, numerical examples demonstrate that the FFT is both computationally more efficient and higher in accuracy. © 2014 Siti Nur Iqmal Ibrahim et al.

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Ibrahim, S. N. I., O’Hara, J. G., & Constantinou, N. (2014). Pricing extendible options using the fast Fourier transform. Mathematical Problems in Engineering, 2014. https://doi.org/10.1155/2014/831470

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