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)

Abstract:

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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