E2016004 March 2016
Wen-Bo Wu1， Yong Li2, Zhuo Huang3
(1,2. Hanqing Advanced Institute of Economics and Finance, Renmin University of China, Beijing, 100872, China)
(3. National School of Development, Peking University)
This paper extends the quadrature method of Andricopoulos, Widdicks, Duck and Newton (2003) to price exotic options under jump-diffusion models in an efficient and accurate manner. We compute the transition density of jump-extended models using convolution integrals and calculate the Greeks of options using Chebyshev polynomials. A simpler and more efficient lattice grid is presented to implement the recursion more directly in matrix form and to save running time. We apply the approach to different jump-extended models to demonstrate its universality and provide a detailed comparison of the discrete path-dependent options to demonstrate its advantages in terms of speed and accuracy.
JEL classification: G13, C63
Keywords: Discrete path-dependent options, Quadrature, Jump-diffusion model, Option hedging
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